David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Patterson-UTI Energy, Inc. (NASDAQ:PTEN) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Patterson-UTI Energy's Debt?
As you can see below, Patterson-UTI Energy had US$901.7m of debt at March 2021, down from US$966.8m a year prior. However, because it has a cash reserve of US$214.1m, its net debt is less, at about US$687.5m.
How Healthy Is Patterson-UTI Energy's Balance Sheet?
The latest balance sheet data shows that Patterson-UTI Energy had liabilities of US$272.3m due within a year, and liabilities of US$987.4m falling due after that. Offsetting these obligations, it had cash of US$214.1m as well as receivables valued at US$181.3m due within 12 months. So it has liabilities totalling US$864.3m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Patterson-UTI Energy has a market capitalization of US$1.75b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Patterson-UTI 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.
In the last year Patterson-UTI Energy had a loss before interest and tax, and actually shrunk its revenue by 58%, to US$919m. That makes us nervous, to say the least.
Not only did Patterson-UTI Energy's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$470m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$475m. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Patterson-UTI Energy .
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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