These 4 Measures Indicate That Pushpay Holdings (NZSE:PPHZ) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Pushpay Holdings Limited (NZSE:PPHZ) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Pushpay Holdings

What Is Pushpay Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Pushpay Holdings had US$47.6m of debt, an increase on none, over one year. However, it also had US$23.1m in cash, and so its net debt is US$24.5m.

A Look At Pushpay Holdings's Liabilities

According to the last reported balance sheet, Pushpay Holdings had liabilities of US$51.1m due within 12 months, and liabilities of US$20.5m due beyond 12 months. On the other hand, it had cash of US$23.1m and US$16.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$32.4m.

Given Pushpay Holdings has a market capitalization of US$1.35b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Pushpay Holdings has a low net debt to EBITDA ratio of only 0.65. And its EBIT easily covers its interest expense, being 48.7 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Better yet, Pushpay Holdings grew its EBIT by 228% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Pushpay Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last two years, Pushpay Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

The good news is that Pushpay Holdings's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! We think Pushpay Holdings is no more beholden to its lenders, than the birds are to birdwatchers. For investing nerds like us its balance sheet is almost charming. 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 Pushpay Holdings 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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