Here's Why Stabilis Solutions (NASDAQ:SLNG) Can Afford Some Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Stabilis Solutions, Inc. (NASDAQ:SLNG) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Stabilis Solutions

What Is Stabilis Solutions's Debt?

As you can see below, at the end of December 2021, Stabilis Solutions had US$12.3m of debt, up from US$7.87m a year ago. Click the image for more detail. However, it also had US$2.31m in cash, and so its net debt is US$10.0m.

A Look At Stabilis Solutions' Liabilities

The latest balance sheet data shows that Stabilis Solutions had liabilities of US$15.6m due within a year, and liabilities of US$10.7m falling due after that. Offsetting this, it had US$2.31m in cash and US$11.3m in receivables that were due within 12 months. So it has liabilities totalling US$12.7m more than its cash and near-term receivables, combined.

Of course, Stabilis Solutions has a market capitalization of US$74.6m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Stabilis Solutions'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 Stabilis Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 86%, to US$77m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Stabilis Solutions's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping US$8.7m. 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. Another cause for caution is that is bled US$2.9m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Stabilis Solutions (including 1 which is significant) .

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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