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 Indonesia Energy Corporation Limited (NYSEMKT:INDO) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Indonesia Energy's Debt?
The chart below, which you can click on for greater detail, shows that Indonesia Energy had US$3.11m in debt in December 2019; about the same as the year before. However, its balance sheet shows it holds US$12.2m in cash, so it actually has US$9.14m net cash.
How Healthy Is Indonesia Energy's Balance Sheet?
According to the last reported balance sheet, Indonesia Energy had liabilities of US$2.74m due within 12 months, and liabilities of US$2.22m due beyond 12 months. On the other hand, it had cash of US$12.2m and US$350.7k worth of receivables due within a year. So it actually has US$7.63m more liquid assets than total liabilities.
It's good to see that Indonesia Energy has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Indonesia Energy has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Indonesia 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.
Over 12 months, Indonesia Energy made a loss at the EBIT level, and saw its revenue drop to US$4.2m, which is a fall of 29%. That makes us nervous, to say the least.
So How Risky Is Indonesia Energy?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Indonesia Energy had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$985k and booked a US$1.7m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$9.14m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Indonesia Energy , 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.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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