PPK Group (ASX:PPK) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies PPK Group Limited (ASX:PPK) makes use of debt. But the more important question is: how much risk is that debt creating?

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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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is PPK Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 PPK Group had AU$5.87m of debt, an increase on AU$3.40m, over one year. However, it also had AU$5.48m in cash, and so its net debt is AU$394.0k.

How Healthy Is PPK Group's Balance Sheet?

The latest balance sheet data shows that PPK Group had liabilities of AU$22.4m due within a year, and liabilities of AU$13.8m falling due after that. Offsetting this, it had AU$5.48m in cash and AU$7.95m in receivables that were due within 12 months. So it has liabilities totalling AU$22.8m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of AU$31.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Carrying virtually no net debt, PPK Group has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. 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.

See our latest analysis for PPK Group

Over 12 months, PPK Group reported revenue of AU$24m, which is a gain of 5.8%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, PPK Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping AU$17m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$16m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with PPK Group (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.