Panoply Holdings (LON:TPX) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that The Panoply Holdings plc (LON:TPX) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Panoply Holdings

What Is Panoply Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Panoply Holdings had UK£13.1m of debt, an increase on UK£5.03m, over one year. On the flip side, it has UK£5.73m in cash leading to net debt of about UK£7.32m.

A Look At Panoply Holdings' Liabilities

The latest balance sheet data shows that Panoply Holdings had liabilities of UK£21.8m due within a year, and liabilities of UK£22.0m falling due after that. Offsetting these obligations, it had cash of UK£5.73m as well as receivables valued at UK£14.7m due within 12 months. So it has liabilities totalling UK£23.4m more than its cash and near-term receivables, combined.

Since publicly traded Panoply Holdings shares are worth a total of UK£213.6m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Panoply Holdings'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.

In the last year Panoply Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 62%, to UK£51m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Panoply Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost UK£1.1m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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£2.2m. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Panoply Holdings , and understanding them should be part of your investment process.

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.
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