Flotek Industries (NYSE:FTK) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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 note that Flotek Industries, Inc. (NYSE:FTK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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$1.53m of debt in September 2024, down from US$3.65m, one year before. But on the other hand it also has US$5.00m in cash, leading to a US$3.47m net cash position.

How Strong Is Flotek Industries' Balance Sheet?

The latest balance sheet data shows that Flotek Industries had liabilities of US$44.7m due within a year, and liabilities of US$6.91m falling due after that. On the other hand, it had cash of US$5.00m and US$65.8m worth of receivables due within a year. So it actually has US$19.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Flotek Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Flotek Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Flotek Industries made a loss at the EBIT level, last year, it was also good to see that it generated US$9.4m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Flotek Industries 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Looking at the most recent year, Flotek Industries recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Flotek Industries has net cash of US$3.47m, as well as more liquid assets than liabilities. So we don't have any problem with Flotek Industries's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Flotek Industries, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.