Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Helmerich & Payne, Inc. (NYSE:HP) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Helmerich & Payne's Debt?
The image below, which you can click on for greater detail, shows that Helmerich & Payne had debt of US$435.9m at the end of December 2020, a reduction from US$479.4m over a year. But it also has US$523.8m in cash to offset that, meaning it has US$87.9m net cash.
A Look At Helmerich & Payne's Liabilities
The latest balance sheet data shows that Helmerich & Payne had liabilities of US$228.3m due within a year, and liabilities of US$1.27b falling due after that. On the other hand, it had cash of US$523.8m and US$233.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$744.4m.
Helmerich & Payne has a market capitalization of US$2.92b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Helmerich & Payne boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Helmerich & Payne's ability to maintain a healthy balance sheet going forward. 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, Helmerich & Payne made a loss at the EBIT level, and saw its revenue drop to US$1.4b, which is a fall of 47%. That makes us nervous, to say the least.
So How Risky Is Helmerich & Payne?
Although Helmerich & Payne had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$299m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Helmerich & Payne (of which 1 is significant!) 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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