Perma-Fix Environmental Services (NASDAQ:PESI) Has A Pretty Healthy Balance Sheet

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 the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 December 2023, Perma-Fix Environmental Services had US$2.75m of debt, up from US$1.04m a year ago. Click the image for more detail. But on the other hand it also has US$7.50m in cash, leading to a US$4.75m net cash position.

A Look At Perma-Fix Environmental Services' Liabilities

According to the last reported balance sheet, Perma-Fix Environmental Services had liabilities of US$25.9m due within 12 months, and liabilities of US$13.4m due beyond 12 months. Offsetting these obligations, it had cash of US$7.50m as well as receivables valued at US$18.2m due within 12 months. So it has liabilities totalling US$13.7m more than its cash and near-term receivables, combined.

Of course, Perma-Fix Environmental Services has a market capitalization of US$159.1m, 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. Despite its noteworthy liabilities, Perma-Fix Environmental Services boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Perma-Fix Environmental Services turned things around in the last 12 months, delivering and EBIT of US$833k. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Perma-Fix Environmental Services may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Perma-Fix Environmental Services actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Perma-Fix Environmental Services's liabilities, but we can be reassured by the fact it has has net cash of US$4.75m. And it impressed us with free cash flow of US$4.4m, being 532% of its EBIT. So is Perma-Fix Environmental Services's debt a risk? It doesn't seem so to us. 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 2 warning signs in our investment analysis , 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.