Would SeaBird Exploration (OB:SBX) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that SeaBird Exploration Plc (OB:SBX) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SeaBird Exploration

What Is SeaBird Exploration's Net Debt?

As you can see below, at the end of September 2020, SeaBird Exploration had US$7.87m of debt, up from US$5.00m a year ago. Click the image for more detail. However, it does have US$5.08m in cash offsetting this, leading to net debt of about US$2.79m.

How Strong Is SeaBird Exploration's Balance Sheet?

We can see from the most recent balance sheet that SeaBird Exploration had liabilities of US$36.6m falling due within a year, and liabilities of US$6.47m due beyond that. Offsetting these obligations, it had cash of US$5.08m as well as receivables valued at US$22.3m due within 12 months. So its liabilities total US$15.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because SeaBird Exploration is worth US$35.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SeaBird Exploration's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, SeaBird Exploration reported revenue of US$53m, which is a gain of 20%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months SeaBird Exploration produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$12m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$957k of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - SeaBird Exploration has 2 warning signs we think you should be aware of.

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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