Does Paylocity Holding (NASDAQ:PCTY) Have A Healthy Balance Sheet?

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. Importantly, Paylocity Holding Corporation (NASDAQ:PCTY) does carry debt. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Paylocity Holding Carry?

The image below, which you can click on for greater detail, shows that at March 2025 Paylocity Holding had debt of US$243.8m, up from none in one year. But on the other hand it also has US$477.8m in cash, leading to a US$234.0m net cash position.

A Look At Paylocity Holding's Liabilities

The latest balance sheet data shows that Paylocity Holding had liabilities of US$3.62b due within a year, and liabilities of US$334.2m falling due after that. Offsetting these obligations, it had cash of US$477.8m as well as receivables valued at US$43.6m due within 12 months. So it has liabilities totalling US$3.44b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Paylocity Holding is worth US$9.77b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Paylocity Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Paylocity Holding

Another good sign is that Paylocity Holding has been able to increase its EBIT by 21% in twelve months, making it easier to pay down 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 Paylocity Holding'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. Paylocity Holding 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, Paylocity Holding 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 Paylocity Holding does have more liabilities than liquid assets, it also has net cash of US$234.0m. And it impressed us with free cash flow of US$336m, being 125% of its EBIT. So is Paylocity Holding's debt a risk? It doesn't seem so to us. We'd be very excited to see if Paylocity Holding insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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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.