Is Nine Energy Service, Inc.'s (NYSE:NINE) Balance Sheet A Threat To Its Future?

Nine Energy Service, Inc. (NYSE:NINE) is a small-cap stock with a market capitalization of US$660m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that NINE is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into NINE here.

Does NINE Produce Much Cash Relative To Its Debt?

Over the past year, NINE has ramped up its debt from US$242m to US$428m , which includes long-term debt. With this rise in debt, NINE's cash and short-term investments stands at US$64m to keep the business going. Additionally, NINE has produced cash from operations of US$90m during the same period of time, leading to an operating cash to total debt ratio of 21%, signalling that NINE’s current level of operating cash is high enough to cover debt.

Can NINE meet its short-term obligations with the cash in hand?

At the current liabilities level of US$108m, the company has been able to meet these obligations given the level of current assets of US$333m, with a current ratio of 3.08x. The current ratio is calculated by dividing current assets by current liabilities. However, many consider a ratio above 3x to be high.

Can NINE service its debt comfortably?

With debt reaching 72% of equity, NINE may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since NINE is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

NINE’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around NINE's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how NINE has been performing in the past. You should continue to research Nine Energy Service to get a more holistic view of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for NINE’s future growth? Take a look at our free research report of analyst consensus for NINE’s outlook.
2. Valuation: What is NINE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether NINE is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.