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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. Importantly, Flotek Industries, Inc. (NYSE:FTK) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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.
How Much Debt Does Flotek Industries Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 Flotek Industries had US$5.67m of debt, an increase on none, over one year. But it also has US$33.9m in cash to offset that, meaning it has US$28.3m net cash.
How Strong Is Flotek Industries' Balance Sheet?
The latest balance sheet data shows that Flotek Industries had liabilities of US$30.2m due within a year, and liabilities of US$8.93m falling due after that. On the other hand, it had cash of US$33.9m and US$11.6m worth of receivables due within a year. So it actually has US$6.43m 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! There's no doubt that we learn most about debt from the balance sheet. But it is Flotek Industries's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Flotek Industries had a loss before interest and tax, and actually shrunk its revenue by 52%, to US$45m. That makes us nervous, to say the least.
So How Risky Is Flotek Industries?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Flotek Industries had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$31m of cash and made a loss of US$81m. While this does make the company a bit risky, it's important to remember it has net cash of US$28.3m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Flotek Industries is showing 3 warning signs in our investment analysis , and 2 of those are significant...
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.
This article by Simply Wall St is general in nature. 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.
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