TravelCenters of America (NASDAQ:TA) Has A Somewhat Strained Balance Sheet

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. Importantly, TravelCenters of America Inc. (NASDAQ:TA) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for TravelCenters of America

What Is TravelCenters of America's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 TravelCenters of America had US$524.9m of debt, an increase on US$338.0m, over one year. But it also has US$621.1m in cash to offset that, meaning it has US$96.2m net cash.

How Strong Is TravelCenters of America's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TravelCenters of America had liabilities of US$573.3m due within 12 months and liabilities of US$2.31b due beyond that. 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.

The deficiency here weighs heavily on the US$569.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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. 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.

If TravelCenters of America can keep growing EBIT at last year's rate of 13% over the last year, then it will find its debt load easier to manage. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, TravelCenters of America burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is 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. 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. Be aware that TravelCenters of America is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

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.