David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Pearl River Holdings Limited (CVE:PRH) uses debt. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Pearl River Holdings
How much debt does Pearl River Holdings have?
As you can see below, at the end of September 2021, Pearl River Holdings had a debt of 14.5 million Canadian yen, compared to 12.6 million Canadian yen a year ago. Click on the image for more details. But on the other hand, he also has 52.5 million Canadian yen in cash, which translates to a net cash position of 38.0 million domestic yen.
How healthy is Pearl River Holdings’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Pearl River Holdings had liabilities of 57.0 million Canadian yen due within 12 months and liabilities of 18.5 million domestic yen due beyond. In compensation for these obligations, it had cash of 52.5 million yen as well as receivables valued at 54.9 million yen due within 12 months. So he actually has 31.8 million Canadian yen Continued liquid assets than total liabilities.
This luscious liquidity means Pearl River Holdings’ balance sheet is as strong as a giant redwood. Given this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Pearl River Holdings has more cash than debt is arguably a good indication that it can safely manage its debt.
Another good sign, Pearl River Holdings was able to increase its EBIT by 23% in twelve months, thus facilitating the repayment of its debt. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since Pearl River Holdings will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Although Pearl River Holdings has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how fast it’s growing. builds (or erodes) cash balance. Over the past three years, Pearl River Holdings has generated free cash flow of a very strong 99% of its EBIT, more than expected. This puts him in a very strong position to pay off the debt.
Abstract
While we sympathize with investors who find debt a concern, you should keep in mind that Pearl River Holdings has net cash of 38.0 million Canadian yen, as well as more liquid assets than liabilities. . And it impressed us with a free cash flow of 8.3 million Canadian yen, or 99% of its EBIT. Ultimately, we are not concerned about Pearl River Holdings’ debt. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 1 warning sign for Pearl River Holdings which you should be aware of before investing here.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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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.