These 4 Measures Indicate That PSSLtd (TWSE:6914) Is Using Debt Reasonably Well

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. As with many other companies PSS Co.,Ltd. (TWSE:6914) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for PSSLtd

How Much Debt Does PSSLtd Carry?

You can click the graphic below for the historical numbers, but it shows that PSSLtd had NT$91.7m of debt in June 2024, down from NT$149.0m, one year before. But it also has NT$1.88b in cash to offset that, meaning it has NT$1.79b net cash.

A Look At PSSLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that PSSLtd had liabilities of NT$2.57b due within 12 months and liabilities of NT$3.42b due beyond that. Offsetting these obligations, it had cash of NT$1.88b as well as receivables valued at NT$246.5m due within 12 months. So it has liabilities totalling NT$3.86b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since PSSLtd has a market capitalization of NT$7.68b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, PSSLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that PSSLtd grew its EBIT at 13% over the last year, further increasing its ability to manage debt. 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 PSSLtd'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 company can only pay off debt with cold hard cash, not accounting profits. PSSLtd 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, PSSLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While PSSLtd does have more liabilities than liquid assets, it also has net cash of NT$1.79b. And it impressed us with free cash flow of NT$2.1b, being 320% of its EBIT. So we are not troubled with PSSLtd's debt use. 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. Case in point: We've spotted 1 warning sign for PSSLtd 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.