TravelCenters of America (NASDAQ:TA) Takes On Some Risk With Its Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, TravelCenters of America Inc. (NASDAQ:TA) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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 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 image below, which you can click on for greater detail, shows that at June 2021 TravelCenters of America had debt of US$525.1m, up from US$337.9m in one year. However, its balance sheet shows it holds US$583.3m in cash, so it actually has US$58.2m net cash.

How Healthy Is TravelCenters of America's Balance Sheet?

The latest balance sheet data shows that TravelCenters of America had liabilities of US$540.2m due within a year, and liabilities of US$2.33b falling due after that. Offsetting these obligations, it had cash of US$583.3m as well as receivables valued at US$142.8m due within 12 months. So its liabilities total US$2.15b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$522.0m 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 definitely think shareholders need to watch this one closely. 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.

Importantly, TravelCenters of America grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. 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, 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 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

While TravelCenters of America does have more liabilities than liquid assets, it also has net cash of US$58.2m. And we liked the look of last year's 32% year-on-year EBIT growth. 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. To that end, you should learn about the 4 warning signs we've spotted with TravelCenters of America (including 1 which is potentially serious) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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