Is Premier Investments (ASX:PMV) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Premier Investments Limited (ASX:PMV) makes use of 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Premier Investments

What Is Premier Investments's Debt?

The chart below, which you can click on for greater detail, shows that Premier Investments had AU$69.0m in debt in July 2023; about the same as the year before. But on the other hand it also has AU$431.3m in cash, leading to a AU$362.3m net cash position.

A Look At Premier Investments' Liabilities

We can see from the most recent balance sheet that Premier Investments had liabilities of AU$336.0m falling due within a year, and liabilities of AU$440.8m due beyond that. On the other hand, it had cash of AU$431.3m and AU$24.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$320.6m.

Of course, Premier Investments has a market capitalization of AU$3.70b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Premier Investments also has more cash than debt, so we're pretty confident it can manage its debt safely.

While Premier Investments doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Premier Investments's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Premier Investments may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Premier Investments generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Premier Investments's liabilities, but we can be reassured by the fact it has has net cash of AU$362.3m. And it impressed us with free cash flow of AU$343m, being 99% of its EBIT. So we don't think Premier Investments's use of debt is risky. Given Premier Investments has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.