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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Quintana Energy Services Inc. (NYSE:QES) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Quintana Energy Services's Net Debt?
The chart below, which you can click on for greater detail, shows that Quintana Energy Services had US$35.0m in debt in June 2019; about the same as the year before. On the flip side, it has US$16.6m in cash leading to net debt of about US$18.4m.
How Healthy Is Quintana Energy Services's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Quintana Energy Services had liabilities of US$81.4m due within 12 months and liabilities of US$55.3m due beyond that. Offsetting these obligations, it had cash of US$16.6m as well as receivables valued at US$92.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$27.2m.
This deficit isn't so bad because Quintana Energy Services is worth US$55.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Quintana Energy Services'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.
In the last year Quintana Energy Services wasn't profitable at an EBIT level, but managed to grow its revenue by7.4%, to US$578m. We usually like to see faster growth from unprofitable companies, but each to their own.
Over the last twelve months Quintana Energy Services produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$21m. 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. Another cause for caution is that is bled US$1.1m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Quintana Energy Services insider transactions.
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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