Mammoth Energy Services (NASDAQ:TUSK) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Mammoth Energy Services, Inc. (NASDAQ:TUSK) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Mammoth Energy Services

What Is Mammoth Energy Services's Net Debt?

As you can see below, at the end of September 2020, Mammoth Energy Services had US$89.8m of debt, up from US$81.7m a year ago. Click the image for more detail. On the flip side, it has US$13.9m in cash leading to net debt of about US$75.9m.

How Strong Is Mammoth Energy Services's Balance Sheet?

The latest balance sheet data shows that Mammoth Energy Services had liabilities of US$111.4m due within a year, and liabilities of US$145.6m falling due after that. Offsetting this, it had US$13.9m in cash and US$411.8m in receivables that were due within 12 months. So it actually has US$168.8m more liquid assets than total liabilities.

This surplus strongly suggests that Mammoth Energy Services has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mammoth Energy Services's earnings that will influence how the balance sheet holds up in the future. 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, Mammoth Energy Services made a loss at the EBIT level, and saw its revenue drop to US$296m, which is a fall of 65%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Mammoth Energy Services's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$105m. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Mammoth Energy Services has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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