Health Check: How Prudently Does Perma-Fix Environmental Services (NASDAQ:PESI) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Perma-Fix Environmental Services, Inc. (NASDAQ:PESI) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Perma-Fix Environmental Services

What Is Perma-Fix Environmental Services's Debt?

As you can see below, at the end of June 2024, Perma-Fix Environmental Services had US$2.24m of debt, up from US$772.0k a year ago. Click the image for more detail. But on the other hand it also has US$18.1m in cash, leading to a US$15.9m net cash position.

How Strong Is Perma-Fix Environmental Services' Balance Sheet?

According to the last reported balance sheet, Perma-Fix Environmental Services had liabilities of US$22.7m due within 12 months, and liabilities of US$13.3m due beyond 12 months. Offsetting this, it had US$18.1m in cash and US$13.5m in receivables that were due within 12 months. So its liabilities total US$4.39m more than the combination of its cash and short-term receivables.

Given Perma-Fix Environmental Services has a market capitalization of US$157.7m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Perma-Fix Environmental Services also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Perma-Fix Environmental Services's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Perma-Fix Environmental Services made a loss at the EBIT level, and saw its revenue drop to US$72m, which is a fall of 10%. That's not what we would hope to see.

So How Risky Is Perma-Fix Environmental Services?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Perma-Fix Environmental Services had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$6.1m and booked a US$6.5m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$15.9m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Perma-Fix Environmental Services is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.