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 “. 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 Pushpay Holdings Limited (NZSE:PPH) uses debt. But the real question is whether this debt makes the business risky.
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. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for Pushpay Holdings
How much debt does Pushpay Holdings have?
You can click on the graph below for historical numbers, but it shows that as of March 2022, Pushpay Holdings had $54.0 million in debt, an increase from zero, year-over-year. However, he has $6.76 million in cash to offset this, resulting in a net debt of approximately $47.2 million.
How strong is Pushpay Holdings’ balance sheet?
We can see from the most recent balance sheet that Pushpay Holdings had liabilities of US$39.4 million due in one year, and liabilities of US$59.7 million due beyond. On the other hand, it had a cash position of 6.76 million dollars and 19.2 million dollars of receivables at less than one year. Thus, its liabilities total $73.2 million more than the combination of its cash and short-term receivables.
Of course, Pushpay Holdings has a market capitalization of US$1.06 billion, so those liabilities are probably manageable. That said, it is clear that we must continue to monitor its record, lest it deteriorate.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Pushpay Holdings has a low net debt to EBITDA ratio of just 0.94. And its EBIT covers its interest charges 38.8 times. So we’re pretty relaxed about his super-conservative use of debt. In contrast, Pushpay Holdings has seen its EBIT fall by 5.9% over the past twelve months. If earnings continue to decline at this rate, the company could find it increasingly difficult to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Pushpay Holdings can strengthen its balance sheet over time. 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, Pushpay Holdings has actually produced more free cash flow than EBIT. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
Pushpay Holdings’ interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But, on a darker note, we are a bit concerned about its EBIT growth rate. When we consider the range of factors above, it seems that Pushpay Holdings is quite sensitive with its use of debt. This means they take on a bit more risk, hoping to increase shareholder returns. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 2 warning signs for Pushpay Holdings which you should be aware of before investing here.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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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.
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