Is Pittards (LON:PTD) A Risky Investment?

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, Pittards plc (LON:PTD) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Pittards

How Much Debt Does Pittards Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Pittards had debt of UK£9.98m, up from UK£9.54m in one year. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Pittards' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pittards had liabilities of UK£9.77m due within 12 months and liabilities of UK£4.10m due beyond that. Offsetting these obligations, it had cash of UK£85.0k as well as receivables valued at UK£2.85m due within 12 months. So it has liabilities totalling UK£10.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the UK£6.08m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Pittards would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pittards'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.

In the last year Pittards had a loss before interest and tax, and actually shrunk its revenue by 32%, to UK£15m. That makes us nervous, to say the least.

Caveat Emptor

While Pittards's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping UK£1.7m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of UK£188k over the last twelve months. So suffice it to say we consider the stock to be risky. 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. For example, we've discovered 3 warning signs for Pittards that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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