Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, PointsBet Holdings Limited (ASX:PBH) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does PointsBet Holdings Carry?
The image below, which you can click on for greater detail, shows that at December 2020 PointsBet Holdings had debt of AU$73.3m, up from none in one year. But on the other hand it also has AU$388.3m in cash, leading to a AU$315.0m net cash position.
How Strong Is PointsBet Holdings' Balance Sheet?
According to the last reported balance sheet, PointsBet Holdings had liabilities of AU$66.8m due within 12 months, and liabilities of AU$81.6m due beyond 12 months. Offsetting these obligations, it had cash of AU$388.3m as well as receivables valued at AU$306.3k due within 12 months. So it can boast AU$240.2m more liquid assets than total liabilities.
This surplus suggests that PointsBet Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that PointsBet Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if PointsBet Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, PointsBet Holdings reported revenue of AU$123m, which is a gain of 199%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is PointsBet Holdings?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that PointsBet Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$88m and booked a AU$95m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of AU$315.0m. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that PointsBet Holdings has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with PointsBet Holdings .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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