While small-cap stocks, such as Nine Energy Service Inc (NYSE:NINE) with its market cap of US$737.24m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Energy Services companies, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into NINE here.
How much cash does NINE generate through its operations?
NINE’s debt levels have fallen from US$250.08m to US$113.71m over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$72.90m , ready to deploy into the business. On top of this, NINE has produced US$33.12m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 29.12%, meaning that NINE’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In NINE’s case, it is able to generate 0.29x cash from its debt capital.
Can NINE meet its short-term obligations with the cash in hand?
With current liabilities at US$62.32m, it seems that the business has been able to meet these obligations given the level of current assets of US$217.59m, with a current ratio of 3.49x. However, a ratio greater than 3x may be considered as too high, as NINE could be holding too much capital in a low-return investment environment.
Is NINE’s debt level acceptable?
NINE’s level of debt is appropriate relative to its total equity, at 24.75%. This range is considered safe as NINE is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Risk around debt is very low for NINE, and the company also has the ability and headroom to increase debt if needed going forward.Next Steps:
NINE has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure NINE has company-specific issues impacting its capital structure decisions. You should continue to research Nine Energy Service to get a more holistic view of the stock by looking at:
- 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.
- 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.
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.