We Think Procurri (SGX:BVQ) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Procurri

What Is Procurri's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Procurri had debt of S$21.0m, up from S$16.7m in one year. But on the other hand it also has S$32.7m in cash, leading to a S$11.7m net cash position.

How Strong Is Procurri's Balance Sheet?

According to the last reported balance sheet, Procurri had liabilities of S$63.7m due within 12 months, and liabilities of S$13.5m due beyond 12 months. Offsetting these obligations, it had cash of S$32.7m as well as receivables valued at S$34.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$9.90m.

Of course, Procurri has a market capitalization of S$107.4m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Procurri boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Procurri's EBIT was down 98% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Procurri has S$11.7m in net cash. The cherry on top was that in converted 347% of that EBIT to free cash flow, bringing in S$26m. So we are not troubled with Procurri's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 6 warning signs for Procurri (2 can't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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