Is ProntoForms (CVE:PFM) Using Debt Sensibly?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, ProntoForms Corporation (CVE:PFM) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. 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 ProntoForms

How Much Debt Does ProntoForms Carry?

The image below, which you can click on for greater detail, shows that at December 2020 ProntoForms had debt of US$3.22m, up from US$2.72m in one year. But on the other hand it also has US$7.75m in cash, leading to a US$4.53m net cash position.

How Strong Is ProntoForms' Balance Sheet?

According to the last reported balance sheet, ProntoForms had liabilities of US$7.37m due within 12 months, and liabilities of US$3.71m due beyond 12 months. On the other hand, it had cash of US$7.75m and US$3.86m worth of receivables due within a year. So it actually has US$531.1k more liquid assets than total liabilities.

This state of affairs indicates that ProntoForms' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$112.5m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that ProntoForms has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ProntoForms 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.

In the last year ProntoForms wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to US$18m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is ProntoForms?

Although ProntoForms had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$107k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with ProntoForms .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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