While small-cap stocks, such as Nine Energy Service Inc (NYSE:NINE) with its market cap of US$1.1b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Energy Services industry, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so Iâd encourage you to dig deeper yourself into NINE here.
NINEâs debt levels have fallen from US$255m to US$114m over the last 12 months , which comprises of short- and long-term debt. With this debt payback, NINEâs cash and short-term investments stands at US$71m for investing into the business. Moreover, NINE has produced cash from operations of US$52m during the same period of time, leading to an operating cash to total debt ratio of 46%, signalling that NINEâs current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In NINEâs case, it is able to generate 0.46x cash from its debt capital.
Looking at NINEâs most recent US$71m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.57x. Having said that, a ratio greater than 3x may be considered as quite high.
With a debt-to-equity ratio of 24%, NINEâs debt level may be seen as prudent. This range is considered safe as NINE is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investorsâ risk associated with debt is very low with NINE, and the company has plenty of headroom and ability to raise debt should it need to in the future.
NINEâs high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and Iâm sure NINE has company-specific issues impacting its capital structure decisions. You should continue to research Nine Energy Service to get a more holistic view of the stock by looking at:
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