Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We can see that Daseke, Inc. (NASDAQ:DSKE) uses debt in its business. But the more important question is: what risk does this debt create?
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Daseke
What is Daseke’s debt?
The graph below, which you can click on for more details, shows that Daseke had $570.6 million in debt as of June 2022; about the same as the previous year. However, since he has a cash reserve of $152.0 million, his net debt is less, at around $418.6 million.
A look at Daseke’s responsibilities
The latest balance sheet data shows that Daseke had liabilities of $243.2 million due within the year, and liabilities of $707.7 million due thereafter. On the other hand, it had $152.0 million in cash and $223.3 million in receivables within one year. Thus, its liabilities total $575.6 million more than the combination of its cash and short-term receivables.
Given that this deficit is actually greater than the company’s market capitalization of $455.3 million, we think shareholders really should be watching Daseke’s debt level, like a parent watching their child do bike for the first time. In the scenario where the company were to quickly clean up its balance sheet, it seems likely that shareholders would suffer significant dilution.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Daseke’s net debt is at a very reasonable 2.2 times its EBITDA, while its EBIT covered its interest charges at just 3.7 times last year. While these numbers don’t alarm us, it’s worth noting that the company’s cost of debt has a real impact. Above all, Daseke has increased its EBIT by 32% over the last twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Daseke’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Daseke has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our point of view
Daseke’s ability to convert EBIT to free cash flow and its rate of EBIT growth has given us comfort in its ability to manage its debt. But truth be told, his total passive level had us biting our nails. Looking at all this data, we feel a little cautious about Daseke’s debt levels. While we understand that debt can improve returns on equity, we suggest shareholders keep a close eye on their level of debt, lest it increase. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 1 warning sign for Daseke you should be aware.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.