Here's Why NexTier Oilfield Solutions (NYSE:NEX) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies NexTier Oilfield Solutions Inc. (NYSE:NEX) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, 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.

View our latest analysis for NexTier Oilfield Solutions

How Much Debt Does NexTier Oilfield Solutions Carry?

The image below, which you can click on for greater detail, shows that at December 2021 NexTier Oilfield Solutions had debt of US$381.4m, up from US$346.7m in one year. However, it does have US$118.4m in cash offsetting this, leading to net debt of about US$263.0m.

How Healthy Is NexTier Oilfield Solutions' Balance Sheet?

We can see from the most recent balance sheet that NexTier Oilfield Solutions had liabilities of US$471.7m falling due within a year, and liabilities of US$438.9m due beyond that. Offsetting this, it had US$118.4m in cash and US$301.7m in receivables that were due within 12 months. So it has liabilities totalling US$490.4m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since NexTier Oilfield Solutions has a market capitalization of US$2.32b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if NexTier Oilfield Solutions can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year NexTier Oilfield Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to US$1.4b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months NexTier Oilfield Solutions produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$118m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$239m of cash over the last year. So in short it's a really risky stock. 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. For instance, we've identified 4 warning signs for NexTier Oilfield Solutions that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.