PTC (NASDAQ:PTC) Seems to Use Debt Sparingly

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. 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. Above all, PTC Inc. (NASDAQ:PTC) is in debt. But the real question is whether this debt makes the business risky.

When is debt dangerous?

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 frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for PTC

What is PTC’s debt?

As you can see below, PTC had $1.27 billion in debt in March 2022, up from $1.51 billion the previous year. On the other hand, he has $306.7 million in cash, resulting in a net debt of around $958.8 million.

NasdaqGS: History of PTC Debt to Equity May 18, 2022

How strong is PTC’s balance sheet?

The latest balance sheet data shows that PTC had liabilities of US$782.4 million due within one year, and liabilities of US$1.51 billion falling due thereafter. In return for these bonds, it had cash of US$306.7 million and receivables valued at US$521.7 million due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $1.47 billion.

Given that PTC has a colossal market cap of US$12.7 billion, it’s hard to believe that these liabilities pose much of a threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

PTC’s net debt of 1.9 times EBITDA suggests judicious use of debt. And the fact that its trailing twelve months EBIT was 9.2 times its interest expense aligns with that theme. Above all, PTC has increased its EBIT by 34% over the last twelve months, and this growth will make it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But future earnings, more than anything, will determine PTC’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, PTC has had free cash flow of 95% of its EBIT, which is higher than we would typically expect. This positions him well to pay off debt if desired.

Our point of view

The good news is that PTC’s demonstrated ability to convert EBIT into free cash flow delights us like a fluffy puppy does a toddler. And the good news does not stop there, since its EBIT growth rate also confirms this impression! Overall, we think PTC’s use of debt seems entirely reasonable and we’re not worried about that. Although debt carries risks, when used wisely, it can also generate a higher return on equity. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 1 warning sign for PTC you should be aware.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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.

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