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.' 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. As with many other companies Pureprofile Ltd (ASX:PPL) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Pureprofile

What Is Pureprofile's Net Debt?

As you can see below, Pureprofile had AU$2.92m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have AU$5.24m in cash offsetting this, leading to net cash of AU$2.32m.

How Healthy Is Pureprofile's Balance Sheet?

The latest balance sheet data shows that Pureprofile had liabilities of AU$15.6m due within a year, and liabilities of AU$4.31m falling due after that. Offsetting these obligations, it had cash of AU$5.24m as well as receivables valued at AU$11.5m due within 12 months. So it has liabilities totalling AU$3.16m more than its cash and near-term receivables, combined.

Of course, Pureprofile has a market capitalization of AU$25.5m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Pureprofile boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Pureprofile improved its EBIT from a last year's loss to a positive AU$803k. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Pureprofile can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Pureprofile 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, Pureprofile actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Pureprofile's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$2.32m. The cherry on top was that in converted 148% of that EBIT to free cash flow, bringing in AU$1.2m. So we are not troubled with Pureprofile's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Pureprofile .

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.