Stock Analysis

We Think Patterson-UTI Energy (NASDAQ:PTEN) Has A Fair Chunk Of Debt

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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.' 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 Patterson-UTI Energy, Inc. (NASDAQ:PTEN) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Patterson-UTI Energy

How Much Debt Does Patterson-UTI Energy Carry?

The image below, which you can click on for greater detail, shows that Patterson-UTI Energy had debt of US$901.9m at the end of June 2021, a reduction from US$967.1m over a year. On the flip side, it has US$216.7m in cash leading to net debt of about US$685.2m.

NasdaqGS:PTEN Debt to Equity History October 28th 2021

A Look At Patterson-UTI Energy's Liabilities

We can see from the most recent balance sheet that Patterson-UTI Energy had liabilities of US$293.5m falling due within a year, and liabilities of US$972.1m due beyond that. Offsetting this, it had US$216.7m in cash and US$196.7m in receivables that were due within 12 months. So it has liabilities totalling US$852.2m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Patterson-UTI Energy is worth US$1.96b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Patterson-UTI Energy made a loss at the EBIT level, and saw its revenue drop to US$961m, which is a fall of 46%. To be frank that doesn't bode well.

Caveat Emptor

While Patterson-UTI Energy'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$468m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$428m. So to be blunt we do think it is risky. 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. For example, we've discovered 3 warning signs for Patterson-UTI Energy that you should be aware of before investing here.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Patterson-UTI Energy is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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