P.A.M. Transportation Services (NASDAQ:PTSI) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies P.A.M. Transportation Services, Inc. (NASDAQ:PTSI) makes use of 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for P.A.M. Transportation Services

What Is P.A.M. Transportation Services's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 P.A.M. Transportation Services had debt of US$271.2m, up from US$239.6m in one year. However, it also had US$25.5m in cash, and so its net debt is US$245.8m.

A Look At P.A.M. Transportation Services's Liabilities

The latest balance sheet data shows that P.A.M. Transportation Services had liabilities of US$135.5m due within a year, and liabilities of US$260.1m falling due after that. Offsetting this, it had US$25.5m in cash and US$74.5m in receivables that were due within 12 months. So it has liabilities totalling US$295.6m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$260.8m 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, P.A.M. Transportation Services made a loss at the EBIT level, and saw its revenue drop to US$468m, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

Not only did P.A.M. Transportation Services's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$181k. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of US$9.8m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for P.A.M. Transportation Services that you should be aware of.

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.

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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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