TravelCenters of America (NASDAQ:TA) Has A Pretty Healthy Balance Sheet

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 note that TravelCenters of America Inc. (NASDAQ:TA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for TravelCenters of America

What Is TravelCenters of America's Debt?

The chart below, which you can click on for greater detail, shows that TravelCenters of America had US$524.6m in debt in March 2022; about the same as the year before. But on the other hand it also has US$544.2m in cash, leading to a US$19.5m net cash position.

How Healthy Is TravelCenters of America's Balance Sheet?

The latest balance sheet data shows that TravelCenters of America had liabilities of US$651.5m due within a year, and liabilities of US$2.26b falling due after that. On the other hand, it had cash of US$544.2m and US$201.8m worth of receivables due within a year. So it has liabilities totalling US$2.17b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$565.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, TravelCenters of America would likely require a major re-capitalisation if it had to pay its creditors today. TravelCenters of America boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Pleasingly, TravelCenters of America is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 124% gain in the last twelve months. 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 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. TravelCenters of America may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, TravelCenters of America recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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$19.5m. And it impressed us with its EBIT growth of 124% over the last year. So we are not troubled with TravelCenters of America's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with TravelCenters of America .

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.

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

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.