Does Industrial Services of America (NASDAQ:IDSA) Have A Healthy Balance Sheet?

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 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 Industrial Services of America, Inc. (NASDAQ:IDSA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Industrial Services of America

What Is Industrial Services of America’s Debt?

The chart below, which you can click on for greater detail, shows that Industrial Services of America had US$8.55m in debt in March 2019; about the same as the year before. However, it also had US$469.0k in cash, and so its net debt is US$8.08m.

NasdaqCM:IDSA Historical Debt, August 14th 2019
NasdaqCM:IDSA Historical Debt, August 14th 2019

How Healthy Is Industrial Services of America’s Balance Sheet?

The latest balance sheet data shows that Industrial Services of America had liabilities of US$9.16m due within a year, and liabilities of US$8.86m falling due after that. On the other hand, it had cash of US$469.0k and US$6.38m worth of receivables due within a year. So its liabilities total US$11.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$7.20m company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt After all, Industrial Services of America would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can’t view debt in total isolation; since Industrial Services of America will need earnings to service that debt. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Industrial Services of America reported revenue of US$61m, which is a gain of 7.3%. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Industrial Services of America produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$177k. Considering that alongside the liabilities mentioned above make us nervous about the company. We’d want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$1.9m over the last twelve months. So suffice it to say we consider the stock to be risky. For riskier companies like Industrial Services of America I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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 editorial-team@simplywallst.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.