While small-cap stocks, such as Nine Energy Service Inc (NYSE:NINE) with its market cap of US$1.1b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Energy Services industry, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into NINE here.
How does NINE’s operating cash flow stack up against its debt?
NINE’s debt levels have fallen from US$255m to US$114m over the last 12 months , which comprises of short- and long-term debt. With this debt payback, NINE’s cash and short-term investments stands at US$71m for investing into the business. Moreover, NINE has produced cash from operations of US$52m during the same period of time, leading to an operating cash to total debt ratio of 46%, signalling that NINE’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In NINE’s case, it is able to generate 0.46x cash from its debt capital.
Can NINE meet its short-term obligations with the cash in hand?
Looking at NINE’s most recent US$71m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.57x. Having said that, a ratio greater than 3x may be considered as quite high.
Does NINE face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 24%, NINE’s debt level may be seen as prudent. This range is considered safe as NINE is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with NINE, and the company has plenty of headroom and ability to raise debt should it need to in the future.
NINE’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure NINE has company-specific issues impacting its capital structure decisions. You should continue to research Nine Energy Service to get a more holistic view of the stock by looking at:
- 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.
- 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.
- 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 past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.