Would Mammoth Energy Services (NASDAQ:TUSK) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Mammoth Energy Services, Inc. (NASDAQ:TUSK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, 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.

Check out 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 Mammoth Energy Services had debt of US$68.0m at the end of June 2021, a reduction from US$91.7m over a year. However, it also had US$12.8m in cash, and so its net debt is US$55.2m.

How Strong Is Mammoth Energy Services' Balance Sheet?

The latest balance sheet data shows that Mammoth Energy Services had liabilities of US$146.8m due within a year, and liabilities of US$102.0m falling due after that. Offsetting this, it had US$12.8m in cash and US$413.3m in receivables that were due within 12 months. So it actually has US$177.4m more liquid assets than total liabilities.

This luscious liquidity implies that Mammoth Energy Services' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 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.

Over 12 months, Mammoth Energy Services made a loss at the EBIT level, and saw its revenue drop to US$270m, which is a fall of 20%. To be frank that doesn't bode well.

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. Indeed, it lost a very considerable US$92m at the EBIT level. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. 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. To that end, you should learn about the 3 warning signs we've spotted with Mammoth Energy Services (including 1 which is significant) .

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.

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.

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