We Think Premier Investments (ASX:PMV) Can Stay On Top Of Its 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.' 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. Importantly, Premier Investments Limited (ASX:PMV) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 2024; about the same as the year before. But on the other hand it also has AU$425.5m in cash, leading to a AU$356.5m net cash position.

A Look At Premier Investments' Liabilities

Zooming in on the latest balance sheet data, we can see that Premier Investments had liabilities of AU$315.5m due within 12 months and liabilities of AU$412.5m due beyond that. Offsetting these obligations, it had cash of AU$425.5m as well as receivables valued at AU$18.7m due within 12 months. So it has liabilities totalling AU$283.8m more than its cash and near-term receivables, combined.

Given Premier Investments has a market capitalization of AU$4.93b, 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. 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.

But the other side of the story is that Premier Investments saw its EBIT decline by 6.9% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Premier Investments can strengthen its balance sheet over time. 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. 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Premier Investments has AU$356.5m in net cash. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in AU$378m. So we don't think Premier Investments's use of debt is risky. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Premier Investments's dividend history, without delay!

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.