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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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Powell Industries, Inc. (NASDAQ:POWL) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
See our latest analysis for Powell Industries
What Is Powell Industries's Debt?
You can click the graphic below for the historical numbers, but it shows that Powell Industries had US$1.20m of debt in June 2019, down from US$1.60m, one year before. But it also has US$78.0m in cash to offset that, meaning it has US$76.8m net cash.
How Strong Is Powell Industries's Balance Sheet?
We can see from the most recent balance sheet that Powell Industries had liabilities of US$129.8m falling due within a year, and liabilities of US$11.6m due beyond that. On the other hand, it had cash of US$78.0m and US$165.9m worth of receivables due within a year. So it can boast US$102.4m more liquid assets than total liabilities.
This surplus suggests that Powell Industries is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Powell Industries boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Powell Industries made a loss at the EBIT level, last year, it was also good to see that it generated US$6.9m in EBIT over the last twelve months. 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 Powell Industries'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.