Is P.C.B. Technologies (TLV:PCBT) Using Debt In A Risky Way?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, P.C.B. Technologies Ltd (TLV:PCBT) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for P.C.B. Technologies

What Is P.C.B. Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that P.C.B. Technologies had US$1.50m of debt in December 2023, down from US$6.21m, one year before. However, it does have US$4.68m in cash offsetting this, leading to net cash of US$3.18m.

A Look At P.C.B. Technologies' Liabilities

We can see from the most recent balance sheet that P.C.B. Technologies had liabilities of US$33.5m falling due within a year, and liabilities of US$13.5m due beyond that. Offsetting these obligations, it had cash of US$4.68m as well as receivables valued at US$31.6m due within 12 months. So its liabilities total US$10.7m more than the combination of its cash and short-term receivables.

Since publicly traded P.C.B. Technologies shares are worth a total of US$74.9m, 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, P.C.B. Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since P.C.B. Technologies will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, P.C.B. Technologies reported revenue of US$136m, which is a gain of 5.9%, 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 P.C.B. Technologies?

While P.C.B. Technologies lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$7.8m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Case in point: We've spotted 4 warning signs for P.C.B. Technologies you should be aware of, and 1 of them makes us a bit uncomfortable.

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.