David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Nabors Industries Ltd. (NYSE:NBR) does use debt in its business. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Nabors Industries's Net Debt?
As you can see below, Nabors Industries had US$3.55b of debt at June 2019, down from US$3.82b a year prior. However, it does have US$395.7m in cash offsetting this, leading to net debt of about US$3.16b.
A Look At Nabors Industries's Liabilities
The latest balance sheet data shows that Nabors Industries had liabilities of US$772.2m due within a year, and liabilities of US$3.87b falling due after that. Offsetting these obligations, it had cash of US$395.7m as well as receivables valued at US$776.8m due within 12 months. So its liabilities total US$3.47b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$647.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt At the end of the day, Nabors Industries would probably need a major re-capitalization if its creditors were to demand repayment. 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 Nabors Industries'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.
Over 12 months, Nabors Industries reported revenue of US$3.1b, which is a gain of 9.3%. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months Nabors Industries produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$66m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through US$2.4m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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 Nabors Industries insider transactions.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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