These 4 Measures Indicate That W&T Offshore (NYSE:WTI) Is Using Debt Extensively

W&T Offshore, Inc. -2.72%

W&T Offshore, Inc.

WTI

2.50

-2.72%

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies W&T Offshore, Inc. (NYSE:WTI) makes use of debt. But should shareholders be worried about its use of debt?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for W&T Offshore

How Much Debt Does W&T Offshore Carry?

You can click the graphic below for the historical numbers, but it shows that W&T Offshore had US$390.6m of debt in December 2023, down from US$693.4m, one year before. On the flip side, it has US$173.3m in cash leading to net debt of about US$217.3m.

debt-equity-history-analysis
NYSE:WTI Debt to Equity History April 3rd 2024

A Look At W&T Offshore's Liabilities

According to the last reported balance sheet, W&T Offshore had liabilities of US$216.9m due within 12 months, and liabilities of US$866.0m due beyond 12 months. Offsetting these obligations, it had cash of US$173.3m as well as receivables valued at US$69.8m due within 12 months. So its liabilities total US$839.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$395.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, W&T Offshore would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

W&T Offshore has a very low debt to EBITDA ratio of 1.3 so it is strange to see weak interest coverage, with last year's EBIT being only 0.61 times the interest expense. So while we're not necessarily alarmed we think that its debt is far from trivial. Shareholders should be aware that W&T Offshore's EBIT was down 94% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if W&T Offshore 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, W&T Offshore recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

On the face of it, W&T Offshore's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at managing its debt, based on its EBITDA,; that's encouraging. Overall, it seems to us that W&T Offshore's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. For example, we've discovered 2 warning signs for W&T Offshore (1 is significant!) that you should be aware of before investing here.

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.

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