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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Flotek Industries, Inc. (NYSE:FTK) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, 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 as of June 2024 Flotek Industries had US$5.95m of debt, an increase on US$328.0k, over one year. However, it also had US$4.78m in cash, and so its net debt is US$1.17m.

How Healthy Is Flotek Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Flotek Industries had liabilities of US$42.6m due within 12 months and liabilities of US$7.17m due beyond that. On the other hand, it had cash of US$4.78m and US$59.2m worth of receivables due within a year. So it can boast US$14.1m 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. But either way, Flotek Industries has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Flotek Industries has net debt of just 0.13 times EBITDA, indicating that it is certainly not a reckless borrower. And this view is supported by the solid interest coverage, with EBIT coming in at 7.8 times the interest expense over the last year. It was also good to see that despite losing money on the EBIT line last year, Flotek Industries turned things around in the last 12 months, delivering and EBIT of US$8.3m. There's no doubt that we learn most about debt from the balance sheet. 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 company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, Flotek Industries 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

Flotek Industries's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its net debt to EBITDA. When we consider all the elements mentioned above, it seems to us that Flotek Industries is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.