We Think Mammoth Energy Services (NASDAQ:TUSK) Has A Fair Chunk Of 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Mammoth Energy Services

How Much Debt Does Mammoth Energy Services Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Mammoth Energy Services had debt of US$92.9m, up from US$86.5m in one year. However, it does have US$16.6m in cash offsetting this, leading to net debt of about US$76.3m.

How Strong Is Mammoth Energy Services' Balance Sheet?

The latest balance sheet data shows that Mammoth Energy Services had liabilities of US$128.6m due within a year, and liabilities of US$132.6m falling due after that. On the other hand, it had cash of US$16.6m and US$421.6m worth of receivables due within a year. So it can boast US$176.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Mammoth Energy Services' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Mammoth Energy Services 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 Mammoth Energy Services had a loss before interest and tax, and actually shrunk its revenue by 50%, to US$313m. That makes us nervous, to say the least.

Caveat Emptor

While Mammoth Energy Services's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$81m. That said, we're impressed with the strong balance sheet liquidity. That should give the business time to grow its cashflow. 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. For example Mammoth Energy Services has 2 warning signs (and 1 which is significant) we think you should know about.

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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