Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Stabilis Solutions's Net Debt?
As you can see below, at the end of September 2021, Stabilis Solutions had US$11.7m of debt, up from US$7.90m a year ago. Click the image for more detail. However, it does have US$3.30m in cash offsetting this, leading to net debt of about US$8.35m.
How Strong Is Stabilis Solutions' Balance Sheet?
According to the last reported balance sheet, Stabilis Solutions had liabilities of US$16.8m due within 12 months, and liabilities of US$8.17m due beyond 12 months. Offsetting these obligations, it had cash of US$3.30m as well as receivables valued at US$9.25m due within 12 months. So its liabilities total US$12.4m more than the combination of its cash and short-term receivables.
Since publicly traded Stabilis Solutions shares are worth a total of US$63.7m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Stabilis Solutions can strengthen its balance sheet over time. 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, Stabilis Solutions reported revenue of US$67m, which is a gain of 66%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
While we can certainly appreciate Stabilis Solutions's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable US$7.6m 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. Another cause for caution is that is bled US$3.0m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Stabilis Solutions that you should be aware of.
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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