Are Nabors Industries Ltd’s (NBR) Interest Costs Too High?
Nabors Industries Ltd (NYSE:NBR) is a small-cap stock with a market capitalization of USD $1.63B. 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. There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. See our latest analysis for NBR
How does NBR’s operating cash flow stack up against its debt?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. In the case of NBR, operating cash flow turned out to be 0.02x its debt level over the past twelve months. An annual operating cash flow of less than a tenth of the overall debt raises red flags, although short-term obstacles and business cyclicality may temporarily impact NBR’s ability to generate cash.
Can NBR meet its short-term obligations with the cash in hand?
What about its other commitments such as payments to suppliers and salaries to its employees? In times of adverse events, NBR may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that NBR is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Does NBR face the risk of succumbing to its debt-load?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. In the case of NBR, the debt-to-equity ratio is over 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, NBR has room for improvement to better cushion for events which may require debt repayment. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that NBR’s financial situation may change. You should always be keeping abreast of market expectations for NBR’s future growth on our free analysis platform.
Are you a potential investor? NBR’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. As a following step, you should take a look at NBR’s past performance analysis on our free platform to figure out NBR’s financial health position.
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.
