Nine Energy Service Inc (NYSE:NINE) is a small-cap stock with a market capitalization of US$640.10M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Energy Services companies, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into NINE here.
How does NINE’s operating cash flow stack up against its debt?
NINE’s debt level has been constant at around US$244.53M over the previous year made up of current and long term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$4.07M , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of NINE’s operating efficiency ratios such as ROA here.
Can NINE pay its short-term liabilities?
Looking at NINE’s most recent US$49.49M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$90.71M, with a current ratio of 1.83x. Usually, for Energy Services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can NINE service its debt comfortably?
NINE is a relatively highly levered company with a debt-to-equity of 75.86%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since NINE is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
NINE’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how NINE has been performing in the past. I suggest you continue to research Nine Energy Service to get a more holistic view of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for NINE’s future growth? Take a look at our free research report of analyst consensus for NINE’s outlook.
- 2. Valuation: What is NINE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether NINE is currently mispriced by the market.
- 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.