Health Check: How Prudently Does Performance Shipping (NASDAQ:PSHG) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Performance Shipping Inc. (NASDAQ:PSHG) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Performance Shipping

What Is Performance Shipping's Debt?

The image below, which you can click on for greater detail, shows that Performance Shipping had debt of US$50.9m at the end of June 2022, a reduction from US$53.8m over a year. On the flip side, it has US$13.3m in cash leading to net debt of about US$37.6m.

How Healthy Is Performance Shipping's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Performance Shipping had liabilities of US$17.4m due within 12 months and liabilities of US$38.5m due beyond that. Offsetting this, it had US$13.3m in cash and US$8.25m in receivables that were due within 12 months. So it has liabilities totalling US$34.3m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$16.9m 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. At the end of the day, Performance Shipping would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Performance Shipping will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Performance Shipping reported revenue of US$44m, which is a gain of 30%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Performance Shipping's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$691k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$8.1m over the last twelve months. That means it's on the risky side of things. 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. Be aware that Performance Shipping is showing 4 warning signs in our investment analysis , and 3 of those can't be ignored...

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. 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.