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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Oceaneering International, Inc. (NYSE:OII) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Oceaneering International Carry?
As you can see below, Oceaneering International had US$795.6m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have US$366.0m in cash offsetting this, leading to net debt of about US$429.6m.
How Strong Is Oceaneering International's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Oceaneering International had liabilities of US$491.0m due within 12 months and liabilities of US$1.09b due beyond that. Offsetting these obligations, it had cash of US$366.0m as well as receivables valued at US$571.2m due within 12 months. So its liabilities total US$642.4m more than the combination of its cash and short-term receivables.
Oceaneering International has a market capitalization of US$1.49b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Oceaneering International can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Oceaneering International managed to grow its revenue by 8.0%, to US$2.0b. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, Oceaneering International had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost US$54m at the EBIT level. 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. However, it doesn't help that it burned through US$33m of cash over the last year. So suffice it to say we do consider the stock to be 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 Oceaneering International insider transactions.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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