We Think Peak Fintech Group (CSE:PKK) Is Taking Some Risk With Its 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.' 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. We note that Peak Fintech Group Inc. (CSE:PKK) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Peak Fintech Group

What Is Peak Fintech Group's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Peak Fintech Group had debt of CA$5.40m, up from CA$4.86m in one year. But it also has CA$7.39m in cash to offset that, meaning it has CA$1.99m net cash.

How Healthy Is Peak Fintech Group's Balance Sheet?

We can see from the most recent balance sheet that Peak Fintech Group had liabilities of CA$22.7m falling due within a year, and liabilities of CA$440.1k due beyond that. On the other hand, it had cash of CA$7.39m and CA$33.6m worth of receivables due within a year. So it actually has CA$17.8m more liquid assets than total liabilities.

This surplus suggests that Peak Fintech Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Peak Fintech Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, Peak Fintech Group made a loss at the EBIT level, last year, but improved that to positive EBIT of CA$255k in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Peak Fintech Group'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 company can only pay off debt with cold hard cash, not accounting profits. Peak Fintech Group 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. Over the last year, Peak Fintech Group saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Peak Fintech Group has CA$1.99m in net cash and a decent-looking balance sheet. So while Peak Fintech Group does not have a great balance sheet, it's certainly not too bad. 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. For instance, we've identified 3 warning signs for Peak Fintech Group (1 is significant) you should be aware of.

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. 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.
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