We believe Rattler Midstream (NASDAQ: RTLR) is taking risks with its debt
Warren Buffett said: “Volatility is far from synonymous with risk”. So it might be obvious that you need to factor in debt, when you think about how risky a given stock is because too much debt can sink a business. Mostly, Rattler Midstream LP (NASDAQ: RTLR) is in debt. But does this debt worry shareholders?
What risk does debt entail?
Debt helps a business until it struggles to pay it off, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. That said, the most common situation is where a business manages its debt reasonably well – and to its advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for Rattler Midstream
What is Rattler Midstream’s debt?
As you can see below, at the end of March 2021, Rattler Midstream had $ 545.4 million in debt, down from $ 451.0 million a year ago. Click on the image for more details. Net debt is about the same because it doesn’t have a lot of cash.
A look at the responsibilities of Rattler Midstream
We can see from the most recent balance sheet that Rattler Midstream had liabilities of US $ 40.6 million due in one year and liabilities of US $ 561.1 million beyond. In return for these obligations, he had cash of US $ 9.76 million as well as receivables valued at US $ 53.3 million due within 12 months. Its liabilities therefore exceed the sum of its cash and (short-term) receivables by US $ 538.6 million.
While that may sound like a lot, it’s not so bad since Rattler Midstream has a market cap of US $ 1.57 billion, and could therefore likely strengthen its balance sheet by raising capital if needed. But we absolutely want to keep our eyes open for indications that its debt is too risky.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) cover his interests. costs (interest coverage). The advantage of this approach is that we take into account both the absolute quantum of the debt (with net debt over EBITDA) and the actual interest charges associated with that debt (with its interest coverage ratio).
Rattler Midstream has net debt to EBITDA of 2.5, which suggests he is using a bit of leverage to boost returns. On the positive side, its EBIT was 7.5 times its interest expense, and its net debt to EBITDA was quite high, at 2.5. Importantly, Rattler Midstream’s EBIT has fallen 29% over the past twelve months. If this decline continues, it will be more difficult to pay off the debt than to sell foie gras at a vegan convention. There is no doubt that the balance sheet tells us the most about debt. But ultimately, the company’s future profitability will decide whether Rattler Midstream can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business can only pay off its debts with cash, not book profits. We must therefore clearly examine whether this EBIT leads to a corresponding free cash flow. Over the past three years, Rattler Midstream has recorded free cash flow of 24% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.
Our point of view
We would go so far as to say that Rattler Midstream’s EBIT growth rate has been disappointing. But at least it’s decent enough to cover your interest costs with your EBIT; it’s encouraging. Looking at the balance sheet and taking all of these factors into account, we think debt makes Rattler Midstream stock a bit risky. Some people like this type of risk, but we are aware of the potential pitfalls, so we would probably prefer it to be less in debt. There is no doubt that the balance sheet tells us the most about debt. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 2 warning signs for Rattler Midstream you have to be aware of it.
If you want to invest in companies that can generate profits without the burden of debt, take a look at this free list of growing companies that have net cash on the balance sheet.
If you want to trade Rattler Midstream, open an account with the cheapest platform * approved by professionals, Interactive brokers. Their clients from more than 200 countries and territories trade stocks, options, futures, currencies, bonds and funds around the world from a single integrated account.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Annual Online Review 2020
Do you have any comments on this article? Concerned about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.