Is Performant Financial (NASDAQ:PFMT) Using Debt Sensibly?

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. Importantly, Performant Financial Corporation (NASDAQ:PFMT) does carry debt. But should shareholders be worried about its use of debt?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Performant Financial

How Much Debt Does Performant Financial Carry?

You can click the graphic below for the historical numbers, but it shows that Performant Financial had US$10.7m of debt in September 2023, down from US$19.3m, one year before. But on the other hand it also has US$17.3m in cash, leading to a US$6.56m net cash position.

How Strong Is Performant Financial's Balance Sheet?

We can see from the most recent balance sheet that Performant Financial had liabilities of US$12.1m falling due within a year, and liabilities of US$10.3m due beyond that. Offsetting these obligations, it had cash of US$17.3m as well as receivables valued at US$21.5m due within 12 months. So it can boast US$16.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Performant Financial could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Performant Financial has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Performant Financial'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.

Over 12 months, Performant Financial saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Performant Financial?

While Performant Financial lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$709k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. To that end, you should be aware of the 1 warning sign we've spotted with Performant Financial .

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.