We Think PKSHA Technology (TSE:3993) Can Manage Its Debt With Ease

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies PKSHA Technology Inc. (TSE:3993) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for PKSHA Technology

What Is PKSHA Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 PKSHA Technology had JP¥3.71b of debt, an increase on JP¥2.81b, over one year. But on the other hand it also has JP¥15.3b in cash, leading to a JP¥11.6b net cash position.

How Healthy Is PKSHA Technology's Balance Sheet?

The latest balance sheet data shows that PKSHA Technology had liabilities of JP¥4.77b due within a year, and liabilities of JP¥4.60b falling due after that. Offsetting this, it had JP¥15.3b in cash and JP¥2.79b in receivables that were due within 12 months. So it actually has JP¥8.69b more liquid assets than total liabilities.

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

Even more impressive was the fact that PKSHA Technology grew its EBIT by 109% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if PKSHA Technology 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While PKSHA Technology 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. Over the most recent three years, PKSHA Technology recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case PKSHA Technology has JP¥11.6b in net cash and a decent-looking balance sheet. And we liked the look of last year's 109% year-on-year EBIT growth. So we don't think PKSHA Technology's use of debt is risky. 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. For example - PKSHA Technology has 1 warning sign we think you should be aware of.

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.