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Is Solaris Oilfield Infrastructure (NYSE:SOI) A Risky Investment?

Simply Wall St

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Solaris Oilfield Infrastructure, Inc. (NYSE:SOI) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Solaris Oilfield Infrastructure

What Is Solaris Oilfield Infrastructure's Net Debt?

The image below, which you can click on for greater detail, shows that Solaris Oilfield Infrastructure had debt of US$184.0k at the end of March 2019, a reduction from US$206.0k over a year. But on the other hand it also has US$10.5m in cash, leading to a US$10.3m net cash position.

NYSE:SOI Historical Debt, July 30th 2019

A Look At Solaris Oilfield Infrastructure's Liabilities

We can see from the most recent balance sheet that Solaris Oilfield Infrastructure had liabilities of US$26.0m falling due within a year, and liabilities of US$85.1m due beyond that. On the other hand, it had cash of US$10.5m and US$40.3m worth of receivables due within a year. So its liabilities total US$60.3m more than the combination of its cash and short-term receivables.

Since publicly traded Solaris Oilfield Infrastructure shares are worth a total of US$642.4m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Solaris Oilfield Infrastructure boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Solaris Oilfield Infrastructure grew its EBIT by 169% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Solaris Oilfield Infrastructure can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Solaris Oilfield Infrastructure has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Solaris Oilfield Infrastructure burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Solaris Oilfield Infrastructure has US$10m in net cash. And it impressed us with its EBIT growth of 169% over the last year. So we are not troubled with Solaris Oilfield Infrastructure's debt use. We'd be motivated to research the stock further if we found out that Solaris Oilfield Infrastructure insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.