Is Sintana Energy (CVE:SEI) Weighed On By Its Debt Load?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Sintana Energy Inc. (CVE:SEI) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Sintana Energy
What Is Sintana Energy's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Sintana Energy had debt of CA$416.3k, up from none in one year. But it also has CA$421.9k in cash to offset that, meaning it has CA$5.6k net cash.
How Strong Is Sintana Energy's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Sintana Energy had liabilities of CA$4.75m due within 12 months and liabilities of CA$416.3k due beyond that. Offsetting this, it had CA$421.9k in cash and CA$3.6k in receivables that were due within 12 months. So its liabilities total CA$4.74m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Sintana Energy is worth CA$11.2m, 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. Despite its noteworthy liabilities, Sintana Energy boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sintana Energy will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Since Sintana Energy doesn't have significant operating revenue, shareholders must hope it'll sell some fossil fuels, before it runs out of money.
So How Risky Is Sintana Energy?
We have no doubt that loss making companies are, in general, riskier than profitable ones. Anf the fact is that over the last twelve months Sintana Energy lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$476k and booked a CA$1.9m accounting loss. Given it only has net cash of CA$422k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Sintana Energy insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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