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Nabors Industries Ltd. (NYSE:NBR) is a small-cap stock with a market capitalization of US$835m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that NBR is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I recommend you dig deeper yourself into NBR here.
NBR’s Debt (And Cash Flows)
NBR has shrunk its total debt levels in the last twelve months, from US$4.3b to US$3.7b – this includes long-term debt. With this debt repayment, NBR currently has US$470m remaining in cash and short-term investments , ready to be used for running the business. Additionally, NBR has produced US$477m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 13%, indicating that NBR’s current level of operating cash is not high enough to cover debt.
Can NBR meet its short-term obligations with the cash in hand?
With current liabilities at US$736m, it appears that the company has been able to meet these obligations given the level of current assets of US$1.6b, with a current ratio of 2.11x. The current ratio is calculated by dividing current assets by current liabilities. For Energy Services companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is NBR’s debt level acceptable?
Since total debt levels exceed equity, NBR is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since NBR is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although NBR’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for NBR's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Nabors Industries to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NBR’s future growth? Take a look at our free research report of analyst consensus for NBR’s outlook.
- Valuation: What is NBR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether NBR is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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 email@example.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.