Health Check: How Prudently Does Pyxis Tankers (NASDAQ:PXS) 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.' 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. We can see that Pyxis Tankers Inc. (NASDAQ:PXS) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Pyxis Tankers

What Is Pyxis Tankers's Debt?

The image below, which you can click on for greater detail, shows that Pyxis Tankers had debt of US$47.8m at the end of June 2021, a reduction from US$56.1m over a year. However, it does have US$10.2m in cash offsetting this, leading to net debt of about US$37.6m.

How Strong Is Pyxis Tankers' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pyxis Tankers had liabilities of US$7.69m due within 12 months and liabilities of US$43.3m due beyond that. Offsetting these obligations, it had cash of US$10.2m as well as receivables valued at US$1.10m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$39.7m.

Given this deficit is actually higher than the company's market capitalization of US$28.8m, we think shareholders really should watch Pyxis Tankers's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Pyxis Tankers's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Pyxis Tankers had a loss before interest and tax, and actually shrunk its revenue by 26%, to US$20m. That makes us nervous, to say the least.

Caveat Emptor

While Pyxis Tankers's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$3.3m. 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 had negative free cash flow of US$11m over the last twelve months. That means it's on the risky side of things. 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 3 warning signs we've spotted with Pyxis Tankers (including 1 which doesn't sit too well with us) .

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.

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.

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