The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Pyxis Tankers Inc. (NASDAQ:PXS) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Pyxis Tankers's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Pyxis Tankers had debt of US$65.4m, up from US$62.4m in one year. However, because it has a cash reserve of US$1.39m, its net debt is less, at about US$64.0m.
How Strong Is Pyxis Tankers's Balance Sheet?
The latest balance sheet data shows that Pyxis Tankers had liabilities of US$16.5m due within a year, and liabilities of US$60.9m falling due after that. On the other hand, it had cash of US$1.39m and US$409.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$75.7m.
This deficit casts a shadow over the US$23.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Pyxis Tankers would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Pyxis Tankers wasn't profitable at an EBIT level, but managed to grow its revenue by4.1%, to US$28m. We usually like to see faster growth from unprofitable companies, but each to their own.
Over the last twelve months Pyxis Tankers produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$5.1m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through US$2.8m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. For riskier companies like Pyxis Tankers I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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