Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Pangea Logistics Solutions, Ltd. (NASDAQ: PANL) uses debt in its business. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first consider both cash and debt levels.
What is the net debt of Pangea Logistics Solutions?
You can click on the graph below for historical figures, but it shows that as of June 2021, Pangea Logistics Solutions had $ 115.5 million in debt, an increase from $ 100.5 million, on a year. On the other hand, it has $ 40.6 million in cash, resulting in net debt of around $ 74.9 million.
NasdaqCM: PANL History of debt to equity October 8, 2021
A look at the responsibilities of Pangea Logistics Solutions
The latest balance sheet data shows that Pangea Logistics Solutions had a liability of $ 86.5 million maturing within one year, and a liability of $ 232.1 million maturing thereafter. In return, he had $ 40.6 million in cash and $ 40.4 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 237.6 million.
Given that this deficit is actually greater than the company’s market cap of $ 237.2 million, we believe shareholders should really watch Pangea Logistics Solutions’ debt levels, like a parent watching their child. riding a bike for the first time. Hypothetically, an extremely high dilution would be necessary if the company were forced to repay its debts by raising capital at the current share price.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
Looking at its net debt over EBITDA of 1.3 and interest coverage of 5.0 times, it seems to us that Pangea Logistics Solutions is probably using the debt in a fairly reasonable way. But the interest payments are certainly enough to make us think about how affordable his debt is. It is important to note that Pangea Logistics Solutions has increased its EBIT by 65% ââover the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Pangea Logistics Solutions can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Pangea Logistics Solutions has spent a lot of money. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.
Our point of view
Neither Pangea Logistics Solutions’ ability to convert EBIT into free cash flow nor its level of total liabilities gave us confidence in its ability to take on more debt. But the good news is that he seems to be able to easily increase his EBIT. Taking the above factors together, we believe that Pangea Logistics Solutions’ debt presents certain risks to the business. So while this leverage increases returns on equity, we wouldn’t really want to see it increase from here. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you should inquire about the 3 warning signs we spotted it with Pangea Logistics Solutions (including 1 which makes us a little uncomfortable).
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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