Stock Analysis

Penn Virginia (NASDAQ:PVAC) Is Carrying A Fair Bit Of Debt

  •  Updated
NasdaqGS:ROCC
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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. As with many other companies Penn Virginia Corporation (NASDAQ:PVAC) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Penn Virginia

What Is Penn Virginia's Debt?

As you can see below, Penn Virginia had US$368.4m of debt at March 2021, down from US$599.4m a year prior. However, it also had US$11.9m in cash, and so its net debt is US$356.5m.

debt-equity-history-analysis
NasdaqGS:PVAC Debt to Equity History May 6th 2021

How Healthy Is Penn Virginia's Balance Sheet?

We can see from the most recent balance sheet that Penn Virginia had liabilities of US$151.8m falling due within a year, and liabilities of US$387.2m due beyond that. Offsetting these obligations, it had cash of US$11.9m as well as receivables valued at US$66.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$460.7m.

This is a mountain of leverage relative to its market capitalization of US$570.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Penn Virginia's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Penn Virginia had a loss before interest and tax, and actually shrunk its revenue by 41%, to US$259m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Penn Virginia's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$61m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$487m. In the meantime, we consider the stock very risky. 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. Case in point: We've spotted 2 warning signs for Penn Virginia you should be aware of, and 1 of them doesn't sit too well with us.

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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