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.' 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. As with many other companies P.A.M. Transportation Services, Inc. (NASDAQ:PTSI) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
What Is P.A.M. Transportation Services's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 P.A.M. Transportation Services had US$243.1m of debt, an increase on US$227.2m, over one year. However, it does have US$26.0m in cash offsetting this, leading to net debt of about US$217.1m.
How Healthy Is P.A.M. Transportation Services's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that P.A.M. Transportation Services had liabilities of US$137.3m due within 12 months and liabilities of US$232.3m due beyond that. Offsetting this, it had US$26.0m in cash and US$62.3m in receivables that were due within 12 months. So it has liabilities totalling US$281.3m more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company's US$216.5m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if P.A.M. Transportation Services can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, P.A.M. Transportation Services made a loss at the EBIT level, and saw its revenue drop to US$475m, which is a fall of 12%. That's not what we would hope to see.
While P.A.M. Transportation Services's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$1.9m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$350.0k in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. Be aware that P.A.M. Transportation Services is showing 2 warning signs in our investment analysis , you should know about...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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