Australia markets closed
  • ALL ORDS

    7,266.30
    +151.80 (+2.13%)
     
  • ASX 200

    6,988.10
    +149.80 (+2.19%)
     
  • AUD/USD

    0.6998
    -0.0035 (-0.50%)
     
  • OIL

    87.29
    +0.68 (+0.79%)
     
  • GOLD

    1,792.30
    -2.70 (-0.15%)
     
  • BTC-AUD

    54,052.11
    +532.96 (+1.00%)
     
  • CMC Crypto 200

    863.83
    +21.37 (+2.54%)
     
  • AUD/EUR

    0.6273
    -0.0035 (-0.56%)
     
  • AUD/NZD

    1.0675
    -0.0006 (-0.06%)
     
  • NZX 50

    11,852.15
    -198.17 (-1.64%)
     
  • NASDAQ

    14,454.61
    +451.50 (+3.22%)
     
  • FTSE

    7,466.07
    -88.24 (-1.17%)
     
  • Dow Jones

    34,725.47
    +564.69 (+1.65%)
     
  • DAX

    15,318.95
    -205.32 (-1.32%)
     
  • Hang Seng

    23,550.08
    -256.92 (-1.08%)
     
  • NIKKEI 225

    26,717.34
    +547.04 (+2.09%)
     

These 4 Measures Indicate That Senex Energy (ASX:SXY) Is Using Debt Reasonably Well

  • Oops!
    Something went wrong.
    Please try again later.
·4-min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • VPTOF

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.' 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 note that Senex Energy Limited (ASX:SXY) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Senex Energy

What Is Senex Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that Senex Energy had AU$68.8m of debt in June 2021, down from AU$118.1m, one year before. However, its balance sheet shows it holds AU$101.0m in cash, so it actually has AU$32.3m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Senex Energy's Liabilities

The latest balance sheet data shows that Senex Energy had liabilities of AU$54.9m due within a year, and liabilities of AU$264.1m falling due after that. Offsetting these obligations, it had cash of AU$101.0m as well as receivables valued at AU$17.6m due within 12 months. So it has liabilities totalling AU$200.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Senex Energy has a market capitalization of AU$828.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Senex Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Senex Energy is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 653% gain in the last twelve months. 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 Senex Energy's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Senex Energy may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last two years, Senex Energy burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While Senex Energy does have more liabilities than liquid assets, it also has net cash of AU$32.3m. And we liked the look of last year's 653% year-on-year EBIT growth. So we don't have any problem with Senex Energy's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Senex Energy , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting