Is Nine Energy Service (NYSE:NINE) Using Too Much Debt?

By
Simply Wall St
Published
September 28, 2020

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Nine Energy Service, Inc. (NYSE:NINE) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Nine Energy Service

What Is Nine Energy Service's Debt?

The image below, which you can click on for greater detail, shows that Nine Energy Service had debt of US$366.2m at the end of June 2020, a reduction from US$391.0m over a year. However, it also had US$88.7m in cash, and so its net debt is US$277.5m.

NYSE:NINE Debt to Equity History September 28th 2020

A Look At Nine Energy Service's Liabilities

The latest balance sheet data shows that Nine Energy Service had liabilities of US$28.8m due within a year, and liabilities of US$370.1m falling due after that. On the other hand, it had cash of US$88.7m and US$40.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$270.2m.

This deficit casts a shadow over the US$36.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Nine Energy Service would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nine Energy Service 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.

Over 12 months, Nine Energy Service made a loss at the EBIT level, and saw its revenue drop to US$565m, which is a fall of 38%. That makes us nervous, to say the least.

Caveat Emptor

While Nine Energy Service's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$45m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost US$566m in the last year. So we think buying this stock is 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. Take risks, for example - Nine Energy Service has 4 warning signs we think 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. 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.
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