Is Pureprofile (ASX:PPL) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Pureprofile Ltd (ASX:PPL) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Pureprofile

What Is Pureprofile's Net Debt?

The chart below, which you can click on for greater detail, shows that Pureprofile had AU$3.00m in debt in December 2021; about the same as the year before. However, its balance sheet shows it holds AU$4.67m in cash, so it actually has AU$1.67m net cash.

A Look At Pureprofile's Liabilities

The latest balance sheet data shows that Pureprofile had liabilities of AU$11.6m due within a year, and liabilities of AU$4.99m falling due after that. Offsetting this, it had AU$4.67m in cash and AU$7.94m in receivables that were due within 12 months. So its liabilities total AU$3.94m more than the combination of its cash and short-term receivables.

Given Pureprofile has a market capitalization of AU$58.7m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Pureprofile 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 future earnings, more than anything, that will determine Pureprofile's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Pureprofile wasn't profitable at an EBIT level, but managed to grow its revenue by 43%, to AU$36m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Pureprofile?

While Pureprofile lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow AU$1.7m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that Pureprofile is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Pureprofile you should know about.

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. 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.