Health Check: How Cautiously Does Precision Drilling (TSE: PD) Use Debt?
Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Mostly, Precision drilling company (TSE: PD) is in debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own 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, 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. The first step when considering a company’s debt levels is to consider its cash flow and debt together.
Check out our latest analysis for precision drilling
How much debt is Precision Drilling?
As you can see below, Precision Drilling had C $ 1.19 billion in debt in March 2021, up from C $ 1.50 billion the year before. On the other hand, he has CA $ 77.8 million in cash, resulting in net debt of around CA $ 1.11 billion.
How strong is Precision Drilling’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Precision Drilling had a liability of C $ 162.7 million due within 12 months and a liability of C $ 1.27 billion beyond. On the other hand, he had cash of C $ 77.8 million and C $ 220.9 million in receivables due within a year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by C $ 1.13 billion.
The lack here weighs heavily on the C $ 695.7 million business itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. We therefore believe that shareholders should monitor it closely. After all, Precision Drilling would likely require a major recapitalization if it were to pay its creditors today. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the future profitability of the business will decide whether Precision Drilling can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
In the past year, Precision Drilling recorded a loss before interest and taxes and actually reduced its revenue by 47% to C $ 793 million. It makes us nervous, to say the least.
While Precision Drilling’s declining revenue is about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less attractive. Indeed, he lost a very considerable amount of 107 million Canadian dollars at the EBIT level. Considering that aside from the liabilities mentioned above, we are nervous about the business. We would like to see big improvements in the short term before we get too interested in the title. For example, we would not want to see a repeat of the loss of C $ 151 million from last year. In the meantime, we consider the title to be risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for precision drilling you should know.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.
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