Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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. We note that Oceaneering International, Inc. (NYSE:OII) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does Oceaneering International Carry?
The chart below, which you can click on for greater detail, shows that Oceaneering International had US$804.9m in debt in March 2021; about the same as the year before. However, it also had US$451.9m in cash, and so its net debt is US$353.0m.
How Strong Is Oceaneering International’s Balance Sheet?
We can see from the most recent balance sheet that Oceaneering International had liabilities of US$416.7m falling due within a year, and liabilities of US$1.04b due beyond that. Offsetting these obligations, it had cash of US$451.9m as well as receivables valued at US$529.8m due within 12 months. So it has liabilities totalling US$473.4m more than its cash and near-term receivables, combined.
This deficit isn’t so bad because Oceaneering International is worth US$1.66b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Oceaneering International’s ability to maintain a healthy balance sheet going forward.
In the last year Oceaneering International had a loss before interest and tax, and actually shrunk its revenue by 17%, to US$1.7b. We would much prefer see growth.
While Oceaneering International’s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$9.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year’s loss of US$139m. So in short it’s a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot.
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