Hurricane Energy (LON:HUR) Is Making Moderate Use Of Debt
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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Hurricane Energy plc (LON:HUR) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Hurricane Energy
How Much Debt Does Hurricane Energy Carry?
The chart below, which you can click on for greater detail, shows that Hurricane Energy had US$202.3m in debt in June 2019; about the same as the year before. However, because it has a cash reserve of US$96.8m, its net debt is less, at about US$105.5m.
A Look At Hurricane Energy's Liabilities
The latest balance sheet data shows that Hurricane Energy had liabilities of US$96.9m due within a year, and liabilities of US$431.7m falling due after that. Offsetting these obligations, it had cash of US$96.8m as well as receivables valued at US$54.4m due within 12 months. So it has liabilities totalling US$377.3m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Hurricane Energy is worth US$1.15b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without 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 Hurricane Energy'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.
In the last year Hurricane Energy managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.
Caveat Emptor
Importantly, Hurricane Energy had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at US$7.1m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$102m of cash over the last year. So in short it's a really risky stock. For riskier companies like Hurricane Energy I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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