Does Flotek Industries (NYSE:FTK) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Flotek Industries, Inc. (NYSE:FTK) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Flotek Industries

What Is Flotek Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Flotek Industries had US$3.31m of debt in March 2024, down from US$44.2m, one year before. However, its balance sheet shows it holds US$5.22m in cash, so it actually has US$1.91m net cash.

How Strong Is Flotek Industries' Balance Sheet?

We can see from the most recent balance sheet that Flotek Industries had liabilities of US$44.8m falling due within a year, and liabilities of US$7.17m due beyond that. Offsetting these obligations, it had cash of US$5.22m as well as receivables valued at US$56.4m due within 12 months. So it can boast US$9.66m more liquid assets than total liabilities.

This surplus suggests that Flotek Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Flotek Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Flotek Industries made a loss at the EBIT level, last year, but improved that to positive EBIT of US$642k in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Flotek Industries's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Flotek Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Flotek Industries saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Flotek Industries has net cash of US$1.91m, as well as more liquid assets than liabilities. So while Flotek Industries does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Flotek Industries is showing 4 warning signs in our investment analysis , and 2 of those are a bit concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.