Would Patterson-UTI Energy (NASDAQ:PTEN) Be Better Off With Less Debt?

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.' 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. We can see that Patterson-UTI Energy, Inc. (NASDAQ:PTEN) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Patterson-UTI Energy

What Is Patterson-UTI Energy's Debt?

As you can see below, Patterson-UTI Energy had US$852.5m of debt at March 2022, down from US$901.7m a year prior. However, it does have US$48.3m in cash offsetting this, leading to net debt of about US$804.3m.

A Look At Patterson-UTI Energy's Liabilities

The latest balance sheet data shows that Patterson-UTI Energy had liabilities of US$396.2m due within a year, and liabilities of US$916.1m falling due after that. On the other hand, it had cash of US$48.3m and US$377.6m worth of receivables due within a year. So its liabilities total US$886.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Patterson-UTI Energy is worth US$3.42b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. 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 reported revenue of US$1.6b, which is a gain of 77%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Patterson-UTI Energy's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$303m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$122m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 Patterson-UTI Energy 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.

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