Would PZ Cussons (LON:PZC) Be Better Off With Less Debt?

Warren Buffett famously said, '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, PZ Cussons plc (LON:PZC) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for PZ Cussons

What Is PZ Cussons's Net Debt?

As you can see below, PZ Cussons had UK£225.3m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have UK£128.6m in cash offsetting this, leading to net debt of about UK£96.7m.

How Strong Is PZ Cussons' Balance Sheet?

We can see from the most recent balance sheet that PZ Cussons had liabilities of UK£204.1m falling due within a year, and liabilities of UK£301.5m due beyond that. On the other hand, it had cash of UK£128.6m and UK£98.0m worth of receivables due within a year. So it has liabilities totalling UK£279.0m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of UK£395.6m, so it does suggest shareholders should keep an eye on PZ Cussons' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 PZ Cussons'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.

Over 12 months, PZ Cussons made a loss at the EBIT level, and saw its revenue drop to UK£597m, which is a fall of 7.6%. That's not what we would hope to see.

Caveat Emptor

Importantly, PZ Cussons had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable UK£55m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of UK£34m. In the meantime, we consider the stock very risky. 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. For example - PZ Cussons has 1 warning sign we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.