Does Solaris Oilfield Infrastructure (NYSE:SOI) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Solaris Oilfield Infrastructure, Inc. (NYSE:SOI) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Solaris Oilfield Infrastructure

How Much Debt Does Solaris Oilfield Infrastructure Carry?

The image below, which you can click on for greater detail, shows that at March 2023 Solaris Oilfield Infrastructure had debt of US$26.0m, up from none in one year. However, because it has a cash reserve of US$2.18m, its net debt is less, at about US$23.8m.

How Healthy Is Solaris Oilfield Infrastructure's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Solaris Oilfield Infrastructure had liabilities of US$55.3m due within 12 months and liabilities of US$107.3m due beyond that. On the other hand, it had cash of US$2.18m and US$72.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$88.4m.

This deficit isn't so bad because Solaris Oilfield Infrastructure is worth US$412.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Solaris Oilfield Infrastructure has a low net debt to EBITDA ratio of only 0.28. And its EBIT easily covers its interest expense, being 61.0 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Even more impressive was the fact that Solaris Oilfield Infrastructure grew its EBIT by 473% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Solaris Oilfield Infrastructure 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last two years, Solaris Oilfield Infrastructure burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Solaris Oilfield Infrastructure's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. All these things considered, it appears that Solaris Oilfield Infrastructure can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Solaris Oilfield Infrastructure that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.