Would NexTier Oilfield Solutions (NYSE:NEX) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, NexTier Oilfield Solutions Inc. (NYSE:NEX) does carry debt. But should shareholders be worried about its use of debt?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for NexTier Oilfield Solutions

What Is NexTier Oilfield Solutions's Net Debt?

As you can see below, NexTier Oilfield Solutions had US$346.7m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of US$276.0m, its net debt is less, at about US$70.7m.

A Look At NexTier Oilfield Solutions' Liabilities

The latest balance sheet data shows that NexTier Oilfield Solutions had liabilities of US$220.2m due within a year, and liabilities of US$380.4m falling due after that. Offsetting these obligations, it had cash of US$276.0m as well as receivables valued at US$122.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$202.0m.

Of course, NexTier Oilfield Solutions has a market capitalization of US$1.19b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year NexTier Oilfield Solutions had a loss before interest and tax, and actually shrunk its revenue by 34%, to US$1.2b. That makes us nervous, to say the least.

Caveat Emptor

Not only did NexTier Oilfield Solutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$256m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$55m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Be aware that NexTier Oilfield Solutions is showing 2 warning signs in our investment analysis , you should know about...

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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