Is Performant Financial (NASDAQ:PFMT) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Performant Financial Corporation (NASDAQ:PFMT) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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$47.9m of debt in September 2021, down from US$60.4m, one year before. But on the other hand it also has US$51.3m in cash, leading to a US$3.40m net cash position.

A Look At Performant Financial's Liabilities

The latest balance sheet data shows that Performant Financial had liabilities of US$61.5m due within a year, and liabilities of US$5.08m falling due after that. Offsetting this, it had US$51.3m in cash and US$26.6m in receivables that were due within 12 months. So it can boast US$11.4m 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. Succinctly put, Performant Financial boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Performant Financial's EBIT was down 85% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Performant Financial can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Performant Financial has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, Performant Financial produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Performant Financial has US$3.40m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$478k, being 79% of its EBIT. So we are not troubled with Performant Financial's debt use. 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. For example - Performant Financial has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.