Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Oil States International, Inc. (NYSE:OIS) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 Oil States International Carry?
As you can see below, Oil States International had US$297.7m of debt at June 2019, down from US$349.8m a year prior. However, because it has a cash reserve of US$12.4m, its net debt is less, at about US$285.3m.
How Healthy Is Oil States International's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Oil States International had liabilities of US$191.6m due within 12 months and liabilities of US$386.4m due beyond that. Offsetting these obligations, it had cash of US$12.4m as well as receivables valued at US$263.5m due within 12 months. So it has liabilities totalling US$302.1m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Oil States International has a market capitalization of US$769.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Oil States 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 Oil States International managed to grow its revenue by 20%, to US$1.1b. We usually like to see faster growth from unprofitable companies, but each to their own.
Over the last twelve months Oil States International produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$30m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of-US$42.7m into a profit. So in short it's a really risky stock. 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 Oil States International insider transactions.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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