Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Performant Financial Corporation (NASDAQ:PFMT) 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Performant Financial's Net Debt?
The image below, which you can click on for greater detail, shows that Performant Financial had debt of US$19.6m at the end of December 2021, a reduction from US$60.0m over a year. However, because it has a cash reserve of US$17.3m, its net debt is less, at about US$2.23m.
How Healthy Is Performant Financial's Balance Sheet?
We can see from the most recent balance sheet that Performant Financial had liabilities of US$17.5m falling due within a year, and liabilities of US$22.1m due beyond that. Offsetting these obligations, it had cash of US$17.3m as well as receivables valued at US$32.1m due within 12 months. So it can boast US$9.87m 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. Carrying virtually no net debt, Performant Financial has a very light debt load indeed. 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.
Over 12 months, Performant Financial made a loss at the EBIT level, and saw its revenue drop to US$124m, which is a fall of 20%. To be frank that doesn't bode well.
While Performant Financial's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$1.3m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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. To that end, you should be aware of the 2 warning signs we've spotted with Performant Financial .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.