Is Western Energy Services (TSE: WRG) Using Debt Wisely?
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Mostly, Western Energy Services Corp. (TSE: WRG) is in debt. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Western Energy Services
What is the net debt of Western Energy Services?
You can click on the graph below for historical figures, but it shows that as of June 2021, Western Energy Services had a debt of C $ 221.6 million, an increase from $ 208.5 million. Canadian, over one year. However, given that it has a cash reserve of C $ 5.59 million, its net debt is less, at approximately C $ 216.0 million.
How strong is Western Energy Services’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Western Energy Services had C $ 28.1 million in liabilities due within 12 months and C $ 231.4 million in liabilities beyond. In compensation for these obligations, it had cash of C $ 5.59 million as well as receivables valued at C $ 17.3 million maturing within 12 months. Its liabilities therefore total C $ 236.6 million more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the C $ 23.7 million company, like a colossus towering over mere mortals. So we would be watching its record closely, without a doubt. Ultimately, Western Energy Services would likely need a major recapitalization if its creditors demanded repayment. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Western Energy Services can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Over 12 months, Western Energy Services recorded a loss in EBIT and saw sales fall to C $ 98 million, a decrease of 37%. To be frank, that doesn’t bode well.
While Western Energy Services’ decline in revenue is about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less attractive. Its loss of EBIT was Cdn $ 28 million. Thinking about this and the large total liabilities, it’s hard to know what to say about the stock due to our intense de-refinement for it. Like all long shots, we’re sure it has a brilliant presentation outlining its blue sky potential. But the reality is that he has few liquid assets compared to liabilities and has lost C $ 37 million in the past year. So we’re not very keen on owning this stock. It’s too risky for us. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Western Energy Services has 2 warning signs we think you should be aware.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth net stocks today.
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