Is Stabilis Solutions (NASDAQ:SLNG) Using Too Much 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. Importantly, Stabilis Solutions, Inc. (NASDAQ:SLNG) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Stabilis Solutions

How Much Debt Does Stabilis Solutions Carry?

The image below, which you can click on for greater detail, shows that Stabilis Solutions had debt of US$9.92m at the end of June 2023, a reduction from US$12.2m over a year. However, it also had US$8.32m in cash, and so its net debt is US$1.60m.

How Strong Is Stabilis Solutions' Balance Sheet?

The latest balance sheet data shows that Stabilis Solutions had liabilities of US$13.7m due within a year, and liabilities of US$8.43m falling due after that. On the other hand, it had cash of US$8.32m and US$4.95m worth of receivables due within a year. So its liabilities total US$8.88m more than the combination of its cash and short-term receivables.

Of course, Stabilis Solutions has a market capitalization of US$92.4m, 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 you can't view debt in total isolation; since Stabilis Solutions will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Stabilis Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to US$95m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Stabilis Solutions produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$98k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of US$5.9m and a profit of US$152k. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. For example, we've discovered 1 warning sign for Stabilis Solutions that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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