ProntoForms (CVE:PFM) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that ProntoForms Corporation (CVE:PFM) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 ProntoForms

What Is ProntoForms's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 ProntoForms had US$3.24m of debt, an increase on US$2.79m, over one year. But it also has US$6.51m in cash to offset that, meaning it has US$3.27m net cash.

A Look At ProntoForms' Liabilities

We can see from the most recent balance sheet that ProntoForms had liabilities of US$7.61m falling due within a year, and liabilities of US$3.55m due beyond that. Offsetting this, it had US$6.51m in cash and US$2.95m in receivables that were due within 12 months. So its liabilities total US$1.69m more than the combination of its cash and short-term receivables.

Since publicly traded ProntoForms shares are worth a total of US$82.1m, 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. While it does have liabilities worth noting, ProntoForms also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ProntoForms's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, ProntoForms reported revenue of US$19m, which is a gain of 12%, although it did not report any earnings before interest and tax. 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?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months ProntoForms lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$1.7m of cash and made a loss of US$4.3m. While this does make the company a bit risky, it's important to remember it has net cash of US$3.27m. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for ProntoForms 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. 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.