Is Nabors Industries (NYSE:NBR) Using Debt Sensibly?

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.' 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. As with many other companies Nabors Industries Ltd. (NYSE:NBR) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that NBR is potentially undervalued!

What Is Nabors Industries's Net Debt?

The image below, which you can click on for greater detail, shows that Nabors Industries had debt of US$2.59b at the end of September 2022, a reduction from US$3.08b over a year. However, because it has a cash reserve of US$425.1m, its net debt is less, at about US$2.16b.

How Healthy Is Nabors Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nabors Industries had liabilities of US$559.2m due within 12 months and liabilities of US$2.93b due beyond that. Offsetting these obligations, it had cash of US$425.1m as well as receivables valued at US$325.9m due within 12 months. So it has liabilities totalling US$2.74b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$1.28b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Nabors Industries would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Nabors Industries can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Nabors Industries reported revenue of US$2.4b, which is a gain of 27%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Nabors Industries's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$54m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of US$405m. In the meantime, we consider the stock to be risky. 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. We've identified 2 warning signs with Nabors Industries , and understanding them should be part of your investment process.

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.