Yahoo Finance Empire Energy Group (ASX:EEG) Has Debt But No Earnings; Should You Worry?
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 can see that Empire Energy Group Limited (ASX:EEG) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Empire Energy Group
What Is Empire Energy Group's Net Debt?
As you can see below, Empire Energy Group had AU$8.24m of debt at June 2021, down from AU$9.35m a year prior. However, its balance sheet shows it holds AU$41.7m in cash, so it actually has AU$33.4m net cash.
How Healthy Is Empire Energy Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Empire Energy Group had liabilities of AU$16.7m due within 12 months and liabilities of AU$22.7m due beyond that. Offsetting this, it had AU$41.7m in cash and AU$2.49m in receivables that were due within 12 months. So it actually has AU$4.79m more liquid assets than total liabilities.
This short term liquidity is a sign that Empire Energy Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Empire Energy Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Empire Energy Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Empire Energy Group made a loss at the EBIT level, and saw its revenue drop to AU$6.0m, which is a fall of 19%. That's not what we would hope to see.
So How Risky Is Empire Energy Group?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Empire Energy Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$20m and booked a AU$8.2m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of AU$33.4m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Empire Energy Group (of which 1 is concerning!) you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.
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