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Is Pioneer Power Solutions (NASDAQ:PPSI) Using Debt In A Risky Way?

Simply Wall St

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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Pioneer Power Solutions, Inc. (NASDAQ:PPSI) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Pioneer Power Solutions

What Is Pioneer Power Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that Pioneer Power Solutions had US$25.1m of debt in June 2019, down from US$35.3m, one year before. However, it also had US$4.37m in cash, and so its net debt is US$20.7m.

NasdaqCM:PPSI Historical Debt, November 5th 2019

How Healthy Is Pioneer Power Solutions's Balance Sheet?

According to the last reported balance sheet, Pioneer Power Solutions had liabilities of US$61.1m due within 12 months, and liabilities of US$4.20m due beyond 12 months. On the other hand, it had cash of US$4.37m and US$5.34m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$55.5m.

This deficit casts a shadow over the US$30.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt After all, Pioneer Power Solutions would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Pioneer Power Solutions will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Pioneer Power Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by45%, to US$105m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly savour Pioneer Power Solutions's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Indeed, it lost US$2.5m at the EBIT level. 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$2.5m. In the meantime, we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Pioneer Power Solutions's profit, revenue, and operating cashflow have changed over the last few years.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.