Is Geo Energy Resources (SGX:RE4) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Geo Energy Resources Limited (SGX:RE4) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Geo Energy Resources

What Is Geo Energy Resources's Debt?

The image below, which you can click on for greater detail, shows that Geo Energy Resources had debt of US$58.6m at the end of September 2020, a reduction from US$292.5m over a year. But it also has US$81.8m in cash to offset that, meaning it has US$23.2m net cash.

How Strong Is Geo Energy Resources's Balance Sheet?

We can see from the most recent balance sheet that Geo Energy Resources had liabilities of US$70.1m falling due within a year, and liabilities of US$71.2m due beyond that. Offsetting this, it had US$81.8m in cash and US$30.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$29.5m.

While this might seem like a lot, it is not so bad since Geo Energy Resources has a market capitalization of US$127.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Geo Energy Resources also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Geo Energy Resources's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Geo Energy Resources wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to US$284m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Geo Energy Resources?

While Geo Energy Resources lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$63m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Geo Energy Resources , and understanding them should be part of your investment process.

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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