Health Check: How Prudently Does PPK Group (ASX:PPK) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that PPK Group Limited (ASX:PPK) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for PPK Group

What Is PPK Group's Net Debt?

As you can see below, at the end of June 2022, PPK Group had AU$2.76m of debt, up from AU$399.0k a year ago. Click the image for more detail. But it also has AU$53.0m in cash to offset that, meaning it has AU$50.3m net cash.

A Look At PPK Group's Liabilities

The latest balance sheet data shows that PPK Group had liabilities of AU$3.40m due within a year, and liabilities of AU$4.99m falling due after that. On the other hand, it had cash of AU$53.0m and AU$2.18m worth of receivables due within a year. So it can boast AU$46.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that PPK Group's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, PPK Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is PPK Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

While it hasn't made a profit, at least PPK Group booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is PPK Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year PPK Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$16m and booked a AU$1.9m accounting loss. Given it only has net cash of AU$50.3m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 3 warning signs for PPK Group (1 is a bit unpleasant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.