These 4 Measures Indicate That TravelCenters of America (NASDAQ:TA) Is Using Debt Extensively

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 TravelCenters of America Inc. (NASDAQ:TA) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for TravelCenters of America

What Is TravelCenters of America's Net Debt?

As you can see below, at the end of September 2021, TravelCenters of America had US$524.9m of debt, up from US$338.0m a year ago. Click the image for more detail. But on the other hand it also has US$621.1m in cash, leading to a US$96.2m net cash position.

How Healthy Is TravelCenters of America's Balance Sheet?

According to the last reported balance sheet, TravelCenters of America had liabilities of US$573.3m due within 12 months, and liabilities of US$2.31b due beyond 12 months. Offsetting this, it had US$621.1m in cash and US$149.4m in receivables that were due within 12 months. So it has liabilities totalling US$2.12b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$883.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, TravelCenters of America would probably need a major re-capitalization if its creditors were to demand repayment. Given that TravelCenters of America has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

One way TravelCenters of America could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 13%, as it did over the last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TravelCenters of America'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While TravelCenters of America 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. Over the last three years, TravelCenters of America saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

Although TravelCenters of America's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$96.2m. And it also grew its EBIT by 13% over the last year. Despite its cash we think that TravelCenters of America seems to struggle to handle its total liabilities, so we are wary of the stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for TravelCenters of America you should be aware of, and 2 of them are potentially serious.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.