Here's Why Pureprofile (ASX:PPL) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Pureprofile Ltd (ASX:PPL) does carry debt. But the real question is whether this debt is making the company risky.

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Pureprofile's Net Debt?

As you can see below, Pureprofile had AU$2.82m of debt at December 2024, down from AU$3.02m a year prior. However, it does have AU$5.14m in cash offsetting this, leading to net cash of AU$2.32m.

A Look At Pureprofile's Liabilities

We can see from the most recent balance sheet that Pureprofile had liabilities of AU$19.3m falling due within a year, and liabilities of AU$4.25m due beyond that. Offsetting this, it had AU$5.14m in cash and AU$15.4m in receivables that were due within 12 months. So it has liabilities totalling AU$2.95m more than its cash and near-term receivables, combined.

Since publicly traded Pureprofile shares are worth a total of AU$47.7m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Pureprofile boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Pureprofile

Notably, Pureprofile made a loss at the EBIT level, last year, but improved that to positive EBIT of AU$1.7m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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'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. Pureprofile 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. Happily for any shareholders, Pureprofile actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Pureprofile's liabilities, but we can be reassured by the fact it has has net cash of AU$2.32m. The cherry on top was that in converted 135% of that EBIT to free cash flow, bringing in AU$2.3m. So we are not troubled with Pureprofile's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Pureprofile .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.