Would Prism Johnson (NSE:PRSMJOHNSN) Be Better Off With Less 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.' 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, Prism Johnson Limited (NSE:PRSMJOHNSN) does carry debt. But is this debt a concern to shareholders?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Prism Johnson

What Is Prism Johnson's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Prism Johnson had ₹13.6b of debt, an increase on ₹13.0b, over one year. However, it does have ₹2.81b in cash offsetting this, leading to net debt of about ₹10.8b.

A Look At Prism Johnson's Liabilities

Zooming in on the latest balance sheet data, we can see that Prism Johnson had liabilities of ₹32.5b due within 12 months and liabilities of ₹22.0b due beyond that. Offsetting these obligations, it had cash of ₹2.81b as well as receivables valued at ₹6.79b due within 12 months. So it has liabilities totalling ₹44.9b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Prism Johnson has a market capitalization of ₹81.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Prism Johnson can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Prism Johnson made a loss at the EBIT level, and saw its revenue drop to ₹73b, which is a fall of 5.3%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Prism Johnson produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹315m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹1.2b. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Prism Johnson has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.