Is Ithaca Energy (LON:ITH) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Ithaca Energy plc (LON:ITH) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ithaca Energy

What Is Ithaca Energy's Net Debt?

As you can see below, at the end of September 2024, Ithaca Energy had US$1.00b of debt, up from US$817.1m a year ago. Click the image for more detail. However, it does have US$450.5m in cash offsetting this, leading to net debt of about US$554.1m.

How Strong Is Ithaca Energy's Balance Sheet?

We can see from the most recent balance sheet that Ithaca Energy had liabilities of US$1.21b falling due within a year, and liabilities of US$3.01b due beyond that. Offsetting this, it had US$450.5m in cash and US$335.0m in receivables that were due within 12 months. So its liabilities total US$3.43b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's US$2.73b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ithaca Energy's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Ithaca Energy had a loss before interest and tax, and actually shrunk its revenue by 29%, to US$1.7b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Ithaca Energy's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$109m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. But on the bright side the company actually produced a statutory profit of US$112m and free cash flow of US$637m. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Ithaca Energy has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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