Is Perma-Pipe International Holdings (NASDAQ:PPIH) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Perma-Pipe International Holdings, Inc. (NASDAQ:PPIH) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Perma-Pipe International Holdings

How Much Debt Does Perma-Pipe International Holdings Carry?

The image below, which you can click on for greater detail, shows that Perma-Pipe International Holdings had debt of US$9.60m at the end of July 2020, a reduction from US$14.3m over a year. However, it also had US$9.11m in cash, and so its net debt is US$495.0k.

A Look At Perma-Pipe International Holdings's Liabilities

The latest balance sheet data shows that Perma-Pipe International Holdings had liabilities of US$24.0m due within a year, and liabilities of US$22.6m falling due after that. Offsetting these obligations, it had cash of US$9.11m as well as receivables valued at US$25.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$11.8m.

This deficit isn't so bad because Perma-Pipe International Holdings is worth US$44.3m, 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. But either way, Perma-Pipe International Holdings has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Perma-Pipe International Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Perma-Pipe International Holdings had a loss before interest and tax, and actually shrunk its revenue by 15%, to US$110m. We would much prefer see growth.

Caveat Emptor

Not only did Perma-Pipe International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$2.4m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$896k into a profit. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Perma-Pipe International Holdings you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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