Here's Why PVR (NSE:PVR) Can Afford Some Debt

Warren Buffett famously said, '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. We can see that PVR Limited (NSE:PVR) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 PVR

What Is PVR's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 PVR had ₹52.0b of debt, an increase on ₹47.5b, over one year. On the flip side, it has ₹5.60b in cash leading to net debt of about ₹46.4b.

How Healthy Is PVR's Balance Sheet?

The latest balance sheet data shows that PVR had liabilities of ₹14.3b due within a year, and liabilities of ₹45.2b falling due after that. Offsetting these obligations, it had cash of ₹5.60b as well as receivables valued at ₹994.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹53.0b.

While this might seem like a lot, it is not so bad since PVR has a market capitalization of ₹129.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine PVR'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 PVR wasn't profitable at an EBIT level, but managed to grow its revenue by 590%, to ₹23b. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, PVR still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹612m. 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. 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 ₹2.2b. So to be blunt we do think it is risky. For riskier companies like PVR I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.