Is Strike Energy (ASX:STX) using too much debt?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Mostly, Limited strike energy (ASX:STX) is in debt. But the real question is whether this debt makes the business risky.
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Strike Energy
What is Strike Energy’s debt?
You can click on the graph below for historical figures, but it shows that in December 2021 Strike Energy had debt of A$10.7 million, an increase from A$322,000, year-on-year . But on the other hand, he also has A$40.9 million in cash, resulting in a net cash position of A$30.2 million.
A look at Strike Energy passives
The latest balance sheet data shows that Strike Energy had liabilities of A$18.4 million due within one year, and liabilities of A$17.7 million falling due thereafter. In return for these obligations, it had cash of A$40.9 million and receivables valued at A$1.66 million due within 12 months. He can therefore boast of having 6.37 million Australian dollars of liquid assets more than total Passives.
Considering the size of Strike Energy, it appears its cash is well balanced against its total liabilities. So while it’s hard to imagine the A$607.5m company fighting for cash, we still think it’s worth keeping an eye on its balance sheet. Simply put, the fact that Strike Energy has more cash than debt is arguably a good indication that it can safely manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Strike Energy’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Given its lack of meaningful operating revenue, Strike Energy shareholders are no doubt hoping it can finance itself until it can sell fuels.
So how risky is Strike Energy?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And we note that Strike Energy posted a loss in earnings before interest and taxes (EBIT) over the past year. Indeed, during this period, it burned A$41 million in cash and suffered a loss of A$16 million. But at least it has A$30.2m on the balance sheet to spend on near-term growth. Overall, its balance sheet doesn’t look too risky, at the moment, but we’re still cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, we found 5 warning signs for Strike Energy (3 are a bit of a concern!) that you should be aware of before investing here.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.