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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Patterson-UTI Energy, Inc. (NASDAQ:PTEN) makes use of debt. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Patterson-UTI Energy Carry?
The chart below, which you can click on for greater detail, shows that Patterson-UTI Energy had US$877.7m in debt in June 2022; about the same as the year before. On the flip side, it has US$19.6m in cash leading to net debt of about US$858.1m.
A Look At Patterson-UTI Energy's Liabilities
According to the last reported balance sheet, Patterson-UTI Energy had liabilities of US$448.4m due within 12 months, and liabilities of US$935.5m due beyond 12 months. Offsetting this, it had US$19.6m in cash and US$473.3m in receivables that were due within 12 months. So its liabilities total US$890.9m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Patterson-UTI Energy is worth US$3.10b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Patterson-UTI Energy 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.
Over 12 months, Patterson-UTI Energy reported revenue of US$2.0b, which is a gain of 104%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth
Caveat Emptor
Even though Patterson-UTI Energy managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$164m. 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. Another cause for caution is that is bled US$165m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Patterson-UTI Energy is showing 1 warning sign in our investment analysis , you should know about...
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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