Is PTC Industries (NSE:PTCIL) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, PTC Industries Limited (NSE:PTCIL) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for PTC Industries

What Is PTC Industries's Debt?

As you can see below, PTC Industries had ₹1.11b of debt at September 2024, down from ₹1.84b a year prior. But on the other hand it also has ₹7.30b in cash, leading to a ₹6.20b net cash position.

A Look At PTC Industries' Liabilities

Zooming in on the latest balance sheet data, we can see that PTC Industries had liabilities of ₹1.03b due within 12 months and liabilities of ₹812.5m due beyond that. Offsetting these obligations, it had cash of ₹7.30b as well as receivables valued at ₹1.11b due within 12 months. So it actually has ₹6.57b more liquid assets than total liabilities.

This surplus suggests that PTC Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that PTC Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, PTC Industries grew its EBIT by 4.8% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if PTC Industries 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While PTC Industries has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, PTC Industries burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case PTC Industries has ₹6.20b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 4.8% in the last twelve months. So we are not troubled with PTC Industries's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with PTC Industries (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.