Is PCI-PAL (LON:PCIP) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies PCI-PAL PLC (LON:PCIP) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for PCI-PAL

How Much Debt Does PCI-PAL Carry?

The image below, which you can click on for greater detail, shows that at December 2020 PCI-PAL had debt of UK£2.07m, up from UK£1.50m in one year. But it also has UK£4.23m in cash to offset that, meaning it has UK£2.16m net cash.

How Healthy Is PCI-PAL's Balance Sheet?

We can see from the most recent balance sheet that PCI-PAL had liabilities of UK£6.98m falling due within a year, and liabilities of UK£2.78m due beyond that. On the other hand, it had cash of UK£4.23m and UK£2.94m worth of receivables due within a year. So it has liabilities totalling UK£2.59m more than its cash and near-term receivables, combined.

Since publicly traded PCI-PAL shares are worth a total of UK£50.5m, 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. Despite its noteworthy liabilities, PCI-PAL boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if PCI-PAL can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year PCI-PAL wasn't profitable at an EBIT level, but managed to grow its revenue by 50%, to UK£5.5m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is PCI-PAL?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year PCI-PAL had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through UK£2.4m of cash and made a loss of UK£4.1m. Given it only has net cash of UK£2.16m, the company may need to raise more capital if it doesn't reach break-even soon. PCI-PAL's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that PCI-PAL is showing 4 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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