Is Hurricane Energy (LON:HUR) using too much debt?

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that Hurricane Energy plc (LON:HUR) has debt on its balance sheet. But does this debt worry shareholders?

When is debt a problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth 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 Hurricane Energy

What is Hurricane Energy’s net debt?

As you can see below, Hurricane Energy had US$77.4 million in debt as of December 2021, up from US$216.0 million the previous year. On the other hand, he has $76.8 million in cash, resulting in a net debt of approximately $581.0,000.

AIM:HUR Debt to Equity June 25, 2022

How strong is Hurricane Energy’s balance sheet?

According to the last published balance sheet, Hurricane Energy had liabilities of $110.1 million due within 12 months and liabilities of $51.3 million due beyond 12 months. On the other hand, it had a cash position of 76.8 million dollars and 1.53 million dollars in receivables at less than one year. It therefore has liabilities totaling $83.1 million more than its cash and short-term receivables, combined.

While that might sound like a lot, it’s not that bad since Hurricane Energy has a market capitalization of US$178.5 million, so it could likely bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at its ability to repay debt. Either way, Hurricane Energy has virtually no net debt, so it’s fair to say it’s not heavily leveraged! The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Hurricane 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.

Year-over-year, Hurricane Energy reported revenue of $241 million, a 34% gain, although it reported no earnings before interest and taxes. The shareholders probably have their fingers crossed that she can make a profit.

Caveat Emptor

While we can certainly appreciate Hurricane Energy’s revenue growth, its earnings before interest and tax (EBIT) loss is less than ideal. To be precise, the EBIT loss amounted to 15 million US dollars. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has debt. Quite frankly, we think the track record falls short, although it could improve over time. On the positive side, we note that trailing twelve month EBIT is worse than free cash flow of US$138 million and earnings of US$18 million. So you could say that there is still a chance that this could put things on the right track. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 2 warning signs for Hurricane Energy of which you should be aware.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

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.

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