Is Physitrack (STO:PTRK) 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.' 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. We can see that Physitrack PLC (STO:PTRK) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Physitrack's Net Debt?

The image below, which you can click on for greater detail, shows that Physitrack had debt of €4.04m at the end of September 2025, a reduction from €4.85m over a year. However, because it has a cash reserve of €603.3k, its net debt is less, at about €3.43m.

How Strong Is Physitrack's Balance Sheet?

We can see from the most recent balance sheet that Physitrack had liabilities of €4.50m falling due within a year, and liabilities of €4.67m due beyond that. Offsetting this, it had €603.3k in cash and €1.39m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €7.17m.

Physitrack has a market capitalization of €19.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

Check out our latest analysis for Physitrack

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Given net debt is only 0.78 times EBITDA, it is initially surprising to see that Physitrack's EBIT has low interest coverage of 0.15 times. So while we're not necessarily alarmed we think that its debt is far from trivial. We also note that Physitrack improved its EBIT from a last year's loss to a positive €73k. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Physitrack 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. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Physitrack actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Physitrack's interest cover was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its conversion of EBIT to free cash flow. It's also worth noting that Physitrack is in the Healthcare Services industry, which is often considered to be quite defensive. When we consider all the elements mentioned above, it seems to us that Physitrack is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. We've identified 2 warning signs with Physitrack (at least 1 which makes us a bit uncomfortable) , 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.