Procurri (SGX:BVQ) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Procurri Corporation Limited (SGX:BVQ) makes use of 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Procurri

What Is Procurri's Debt?

The image below, which you can click on for greater detail, shows that Procurri had debt of S$12.1m at the end of December 2021, a reduction from S$21.0m over a year. But on the other hand it also has S$29.6m in cash, leading to a S$17.5m net cash position.

How Healthy Is Procurri's Balance Sheet?

We can see from the most recent balance sheet that Procurri had liabilities of S$71.7m falling due within a year, and liabilities of S$7.40m due beyond that. On the other hand, it had cash of S$29.6m and S$54.8m worth of receivables due within a year. So it actually has S$5.31m more liquid assets than total liabilities.

This surplus suggests that Procurri has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Procurri boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Procurri is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 1,133% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Procurri's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Procurri may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Procurri 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.

Summing up

While it is always sensible to investigate a company's debt, in this case Procurri has S$17.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 777% of that EBIT to free cash flow, bringing in S$8.9m. So we don't think Procurri's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Procurri has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.