We Think Newpark Resources (NYSE:NR) Has A Fair Chunk Of 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. We can see that Newpark Resources, Inc. (NYSE:NR) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Newpark Resources

What Is Newpark Resources's Debt?

The image below, which you can click on for greater detail, shows that Newpark Resources had debt of US$65.0m at the end of March 2021, a reduction from US$162.9m over a year. However, because it has a cash reserve of US$34.2m, its net debt is less, at about US$30.8m.

A Look At Newpark Resources' Liabilities

Zooming in on the latest balance sheet data, we can see that Newpark Resources had liabilities of US$151.1m due within 12 months and liabilities of US$65.6m due beyond that. On the other hand, it had cash of US$34.2m and US$133.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$49.3m.

Of course, Newpark Resources has a market capitalization of US$289.3m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Newpark Resources 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, Newpark Resources made a loss at the EBIT level, and saw its revenue drop to US$469m, which is a fall of 39%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Newpark Resources's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$59m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$74m. In the meantime, we consider the stock very risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Newpark Resources insider transactions.

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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