PPK Group (ASX:PPK) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, PPK Group Limited (ASX:PPK) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for PPK Group

How Much Debt Does PPK Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 PPK Group had AU$3.35m of debt, an increase on AU$2.76m, over one year. But on the other hand it also has AU$40.0m in cash, leading to a AU$36.7m net cash position.

How Strong Is PPK Group's Balance Sheet?

We can see from the most recent balance sheet that PPK Group had liabilities of AU$18.1m falling due within a year, and liabilities of AU$11.8m due beyond that. On the other hand, it had cash of AU$40.0m and AU$5.44m worth of receivables due within a year. So it can boast AU$15.6m more liquid assets than total liabilities.

It's good to see that PPK Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, PPK Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is PPK Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, PPK Group reported revenue of AU$6.4m, which is a gain of 286%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is PPK Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months PPK Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$17m of cash and made a loss of AU$7.8m. Given it only has net cash of AU$36.7m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, PPK Group's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that PPK Group is showing 4 warning signs in our investment analysis , and 1 of those is concerning...

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.