We Think Perma-Pipe International Holdings (NASDAQ:PPIH) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Perma-Pipe International Holdings, Inc. (NASDAQ:PPIH) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Perma-Pipe International Holdings

What Is Perma-Pipe International Holdings's Debt?

As you can see below, at the end of July 2021, Perma-Pipe International Holdings had US$17.3m of debt, up from US$9.60m a year ago. Click the image for more detail. However, it does have US$5.51m in cash offsetting this, leading to net debt of about US$11.8m.

A Look At Perma-Pipe International Holdings' Liabilities

According to the last reported balance sheet, Perma-Pipe International Holdings had liabilities of US$36.9m due within 12 months, and liabilities of US$32.7m due beyond 12 months. On the other hand, it had cash of US$5.51m and US$48.8m worth of receivables due within a year. So its liabilities total US$15.3m more than the combination of its cash and short-term receivables.

Perma-Pipe International Holdings has a market capitalization of US$70.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Perma-Pipe International Holdings will need earnings to service that debt. 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 3.7%, to US$106m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Perma-Pipe International Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$2.3m. 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. However, it doesn't help that it burned through US$9.8m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example Perma-Pipe International Holdings has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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