Would Stabilis Solutions (NASDAQ:SLNG) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Stabilis Solutions, Inc. (NASDAQ:SLNG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Stabilis Solutions

What Is Stabilis Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that Stabilis Solutions had US$9.10m of debt in March 2024, down from US$11.0m, one year before. However, it also had US$8.43m in cash, and so its net debt is US$674.0k.

How Healthy Is Stabilis Solutions' Balance Sheet?

According to the last reported balance sheet, Stabilis Solutions had liabilities of US$10.0m due within 12 months, and liabilities of US$7.45m due beyond 12 months. Offsetting these obligations, it had cash of US$8.43m as well as receivables valued at US$5.90m due within 12 months. So its liabilities total US$3.13m more than the combination of its cash and short-term receivables.

Of course, Stabilis Solutions has a market capitalization of US$79.7m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Stabilis Solutions has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Stabilis Solutions made a loss at the EBIT level, and saw its revenue drop to US$66m, which is a fall of 37%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Stabilis Solutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$1.8m. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of US$3.2m and the profit of US$510k. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Stabilis Solutions you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com