We Think Performant Financial (NASDAQ:PFMT) Has A Fair Chunk Of 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. We can see that Performant Financial Corporation (NASDAQ:PFMT) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Performant Financial

What Is Performant Financial's Net Debt?

As you can see below, Performant Financial had US$19.4m of debt at June 2022, down from US$47.4m a year prior. However, because it has a cash reserve of US$16.0m, its net debt is less, at about US$3.40m.

A Look At Performant Financial's Liabilities

Zooming in on the latest balance sheet data, we can see that Performant Financial had liabilities of US$14.1m due within 12 months and liabilities of US$21.4m due beyond that. Offsetting these obligations, it had cash of US$16.0m as well as receivables valued at US$32.3m due within 12 months. So it actually has US$12.9m more liquid assets than total liabilities.

This surplus suggests that Performant Financial has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

In the last year Performant Financial had a loss before interest and tax, and actually shrunk its revenue by 20%, to US$113m. That's not what we would hope to see.

Caveat Emptor

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$1.8m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Performant Financial .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.