In the spring of 2008, Corporate America was caught off guard. Many companies carried hefty debt loads, and once the financial crisis hit that summer, a number of stocks plunged precipitously on looming bankruptcy fears. The most vulnerable among them: companies with more debt coming due in the following 12 months than cash on hand.
In an economic slowdown, lenders become much more wary of letting a company simply roll over its debt. That's why shares of companies like Hertz (NYSE: HTZ), Domino's Pizza (NYSE: DPZ) and Ford Motor (NYSE: F) briefly saw their shares fall below $3.
Fast-forward to 2012, and now many companies have wizened up. Debt burdens are now much more manageable, and most chief financial officers (CFOs) make sure debt is tied up in long-term borrowings rather than short-term credit lines. Still, not all have learned the lesson. You can still come across companies that are unprepared for the next economic scare. In the table below, you'll find nearly a dozen companies that have more short-term debt than cash.
To be sure, these companies aren't at risk just yet. They may still manage to convert short-term debt into long-term debt, or even be able to generate enough cash flow to cover their obligations. But if the economy sours and these companies wait too long to take action, then their share prices could come under serious pressure. And you won't want to own any of these stocks when that happens.
Assisted-living firm Emeritus (NYSE: ESC) is a perfect example of the kind of balance sheet you need to avoid. The entire industry has been dogged by too much borrowing that fueled a building boom. As a result, many facilities have failed to meet their occupancy targets. When these targets weren't met, cash flow slumped and lenders grew concerned. This has led some industry players such as Sunrise Assisted Living (NYSE: SRZ) to suffer through painful equity dilution to shore up flagging balance sheets.
Might Emeritus be next? Its debt-to-equity ratio stands at nearly 90% -- and more important, its cash on hand isn't enough to meet the company's current portion of its $2.1 billion in long-term debt. In the first quarter of 2012, Emeritus generated $20 million in operating income, but had $39 million in quarterly interest expense. So as it stands, Emeritus wouldn't be able to pay off that debt out of cash flow.
In its favor, Emeritus owns many of its facilities, so it could enter into sale/lease-back agreements to raise cash, though much of the sale proceeds would have to go to lenders, which have asked that the company's long-term debt be secured by its real estate assets. If senior citizens continue to experience financial distress in this weak economy, then they may not be able to afford the fairly pricey of assisted living. If this happens, then Emeritus's cash flow would slump further. It would be wise for management to address this balance sheet risk now and not wait for a rainy day.
Even companies with seemingly steady revenue and income streams possess risk. In order to meet balance sheet obligations, they may need to reduce their dividend sharply. For example, energy storage and transportation firm NuStar Energy (NYSE: NS) carries more than $800 million in short-term debt against just $37 million in cash. As it stands, the company has been paying out more in dividends than its cash flow can support. In fact, dividends per share have exceeded earnings per share for each of the past three years, a period in which NuStar has generated $1.05 billion in cumulative negative free cash flow. This stock's seemingly attractive 8.3% dividend yield looks too good to be true, so you should look for more solid dividend support elsewhere.
Risks to Consider: If you're thinking about shorting any of these stocks, then just remember: a stronger economy would make it easier for these companies to roll over debt as lenders loosen credit standards. So if growth in the U.S. picks back up (or any of the problems in Europe get resolved), then you may want to consider getting out of a short position.
Action to Take --> None of these companies faces imminent distress, but it pays to watch upcoming economic reports and the second-quarter earnings releases from all of the companies in the table above. If cash dwindles further or the current portion of long-term debt rises higher, then these shares could come under serious pressure in the second half of 2012, and you won't want to get caught holding any of these stocks.