We think Oil States International (NYSE: OIS) has a good deal of debt
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We notice that Oil States International, Inc. (NYSE: OIS) has debt on its balance sheet. But the most important question is: what risk does this debt create?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a business’s debt levels is to consider its cash flow and debt together.
What is the debt of Oil States International?
You can click on the graph below for historical figures, but it shows Oil States International had a debt of US $ 178.7 million in September 2021, up from US $ 189.1 million a year earlier. However, because it has a cash reserve of US $ 67.6 million, its net debt is less, at around US $ 111.1 million.
NYSE: OIS History of Debt to Equity December 20, 2021
How strong is Oil States International’s balance sheet?
According to the latest published balance sheet, Oil States International had liabilities of US $ 172.3 million due within 12 months and liabilities of US $ 215.1 million due beyond 12 months. On the other hand, it had US $ 67.6 million in cash and US $ 161.4 million in receivables due within one year. Its liabilities therefore total US $ 158.4 million more than the combination of its cash and short-term receivables.
This deficit is not that big as Oil States International is worth US $ 298.3 million, and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Oil States International’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
In the past year, Oil States International recorded a loss before interest and taxes and actually reduced revenue by 26% to $ 549 million. To be frank, that doesn’t bode well.
Not only has Oil States International revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Its EBIT loss amounted to US $ 101 million. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. Quite frankly, we think the record is far from up to par, although it could improve over time. We’d be better off if he turned his year-over-year loss of US $ 63 million into a profit. So, to be frank, we think it’s risky. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Oil States International you should know.
If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.
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