Is KLX Energy Services Holdings (NASDAQ:KLXE) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies KLX Energy Services Holdings, Inc. (NASDAQ:KLXE) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for KLX Energy Services Holdings

How Much Debt Does KLX Energy Services Holdings Carry?

The chart below, which you can click on for greater detail, shows that KLX Energy Services Holdings had US$243.6m in debt in October 2020; about the same as the year before. However, it does have US$79.8m in cash offsetting this, leading to net debt of about US$163.8m.

How Healthy Is KLX Energy Services Holdings' Balance Sheet?

We can see from the most recent balance sheet that KLX Energy Services Holdings had liabilities of US$82.6m falling due within a year, and liabilities of US$253.1m due beyond that. Offsetting these obligations, it had cash of US$79.8m as well as receivables valued at US$49.4m due within 12 months. So its liabilities total US$206.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$109.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, KLX Energy Services Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine KLX Energy Services Holdings'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.

In the last year KLX Energy Services Holdings had a loss before interest and tax, and actually shrunk its revenue by 51%, to US$289m. To be frank that doesn't bode well.

Caveat Emptor

While KLX Energy Services Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$75m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$45m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that KLX Energy Services Holdings is showing 4 warning signs in our investment analysis , and 1 of those can't be ignored...

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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