Here's Why Perma-Fix Environmental Services (NASDAQ:PESI) Can Afford Some 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 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. Importantly, Perma-Fix Environmental Services, Inc. (NASDAQ:PESI) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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-Fix Environmental Services

How Much Debt Does Perma-Fix Environmental Services Carry?

As you can see below, at the end of September 2023, Perma-Fix Environmental Services had US$3.00m of debt, up from US$1.15m a year ago. Click the image for more detail. However, it also had US$1.99m in cash, and so its net debt is US$1.01m.

A Look At Perma-Fix Environmental Services' Liabilities

Zooming in on the latest balance sheet data, we can see that Perma-Fix Environmental Services had liabilities of US$27.5m due within 12 months and liabilities of US$13.2m due beyond that. Offsetting this, it had US$1.99m in cash and US$24.7m in receivables that were due within 12 months. So it has liabilities totalling US$14.0m more than its cash and near-term receivables, combined.

Of course, Perma-Fix Environmental Services has a market capitalization of US$114.5m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Perma-Fix Environmental Services has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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.

In the last year Perma-Fix Environmental Services wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to US$84m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Perma-Fix Environmental Services had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$924k. 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. Another cause for caution is that is bled US$1.1m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Perma-Fix Environmental Services you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.