Yahoo Finance Cooper Energy (ASX:COE) Is Carrying A Fair Bit Of Debt
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Cooper Energy Limited (ASX:COE) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Cooper Energy
What Is Cooper Energy's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Cooper Energy had AU$213.7m of debt, an increase on AU$116.9m, over one year. On the flip side, it has AU$164.3m in cash leading to net debt of about AU$49.4m.
A Look At Cooper Energy's Liabilities
According to the last reported balance sheet, Cooper Energy had liabilities of AU$57.4m due within 12 months, and liabilities of AU$510.7m due beyond 12 months. Offsetting this, it had AU$164.3m in cash and AU$21.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$382.6m.
This deficit isn't so bad because Cooper Energy is worth AU$924.3m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Cooper Energy can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Cooper Energy reported revenue of AU$76m, which is a gain of 12%. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Cooper Energy had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at AU$19m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$174m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like Cooper Energy I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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