Flotek Industries (NYSE:FTK) Is Carrying A Fair Bit Of Debt

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.' 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. We note that Flotek Industries, Inc. (NYSE:FTK) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Flotek Industries

What Is Flotek Industries's Net Debt?

As you can see below, at the end of March 2022, Flotek Industries had US$36.4m of debt, up from US$5.67m a year ago. Click the image for more detail. However, it also had US$24.8m in cash, and so its net debt is US$11.6m.

How Strong Is Flotek Industries' Balance Sheet?

We can see from the most recent balance sheet that Flotek Industries had liabilities of US$48.9m falling due within a year, and liabilities of US$10.2m due beyond that. On the other hand, it had cash of US$24.8m and US$16.8m worth of receivables due within a year. So its liabilities total US$17.5m more than the combination of its cash and short-term receivables.

Of course, Flotek Industries has a market capitalization of US$96.5m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Flotek Industries made a loss at the EBIT level, and saw its revenue drop to US$44m, which is a fall of 2.5%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Flotek Industries produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$22m 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. However, it doesn't help that it burned through US$29m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Flotek Industries (1 is a bit unpleasant!) that you should be aware of before investing here.

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.