Is Pureprofile (ASX: PPL) Using Too Much Debt?
Legendary fund manager Li Lu (whom Charlie Munger supported) once said: “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Above all, Pureprofile Ltd (ASX: PPL) carries a debt. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
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What is Pureprofile’s net debt?
As you can see below, Pureprofile was in debt of A $ 3.00 million in June 2021, up from A $ 24.4 million the year before. However, his balance sheet shows that he has A $ 3.62 million in cash, so he actually has net cash of A $ 621.7,000.
How strong is Pureprofile’s balance sheet?
According to the latest published balance sheet, Pureprofile had liabilities of AU $ 10.8 million due within 12 months and liabilities of AU $ 4.86 million due beyond 12 months. On the other hand, he had cash of A $ 3.62 million and receivables of A $ 6.39 million within a year. As a result, its liabilities total A $ 5.64 million more than the combination of its cash and short-term receivables.
Given that the listed Pureprofile shares are worth a total of A $ 77.0 million, it seems unlikely that this level of liabilities is a major threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. Despite its notable liabilities, Pureprofile has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load! When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Pureprofile’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Over 12 months, Pureprofile reported revenue of A $ 30 million, a gain of 24%, although it reported no profit before interest and taxes. The shareholders are probably keeping their fingers crossed that this could generate a profit.
So how risky is Pureprofile?
Although Pureprofile recorded a loss of profit before interest and taxes (EBIT) in the last twelve months, it made a statutory profit of 2.8 million Australian dollars. So taking this at face value, and given the money, we don’t think it’s very risky in the short term. The good news for Pureprofile shareholders is that its revenue growth is strong, making it easier to raise capital when needed. But we still think it’s a bit risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 4 warning signs for Pureprofile (2 cannot be ignored) you must be aware.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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