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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, PTC Inc. (NASDAQ: PTC) is in debt. But should shareholders be concerned about its use of debt?
When Is Debt a Problem?
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. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for PTC
What is PTC’s net debt?
As you can see below, at the end of June 2021, PTC had $ 1.48 billion in debt, up from $ 1.12 billion a year ago. Click on the image for more details. However, given that it has a cash reserve of US $ 365.8 million, its net debt is less, at around US $ 1.11 billion.
Is PTC’s track record healthy?
The latest balance sheet data shows that PTC had liabilities of US $ 746.2 million due within one year, and liabilities of US $ 1.74 billion due after that. On the other hand, he had cash of US $ 365.8 million and receivables worth US $ 433.0 million within one year. It therefore has liabilities totaling US $ 1.68 billion more than its cash and short-term receivables combined.
Considering that publicly traded PTC stocks are worth a very impressive US $ 15.0 billion total, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We measure a company’s debt load relative to its earning capacity 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 costs (interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
PTC has a net debt to EBITDA of 2.8, which suggests that it is using a little leverage to increase returns. But the high interest coverage of 7.3 suggests that he can easily pay off that debt. It is important to note that PTC has increased its EBIT by 46% over the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that 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.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, PTC has actually generated more free cash flow than EBIT. There is nothing better than cash flow to stay in the good graces of your lenders.
Our point of view
PTC’s conversion of EBIT to free cash flow 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’re a little concerned about its net debt to EBITDA. Overall, we think PTC’s use of debt looks very reasonable and we don’t care. After all, reasonable leverage can increase returns on equity. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 2 warning signs with PTC, and understanding them should be part of your investment process.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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 material. Simply Wall St has no position in the mentioned stocks.
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