These 4 Measures Indicate That Premier Investments (ASX:PMV) Is Using Debt Reasonably Well

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.' 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. As with many other companies Premier Investments Limited (ASX:PMV) makes use of debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Premier Investments's Net Debt?

As you can see below, Premier Investments had AU$69.0m of debt, at July 2025, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds AU$345.5m in cash, so it actually has AU$276.5m net cash.

A Look At Premier Investments' Liabilities

We can see from the most recent balance sheet that Premier Investments had liabilities of AU$162.7m falling due within a year, and liabilities of AU$269.3m due beyond that. Offsetting these obligations, it had cash of AU$345.5m as well as receivables valued at AU$31.2m due within 12 months. So it has liabilities totalling AU$55.4m more than its cash and near-term receivables, combined.

This state of affairs indicates that Premier Investments' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the AU$2.92b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Check out our latest analysis for Premier Investments

In fact Premier Investments's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Premier Investments has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Premier Investments actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Premier Investments has AU$276.5m in net cash. The cherry on top was that in converted 117% of that EBIT to free cash flow, bringing in AU$220m. So we are not troubled with Premier Investments's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Premier Investments that you should be aware of.

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.