Is Pro-Dex (NASDAQ:PDEX) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Pro-Dex, Inc. (NASDAQ:PDEX) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Pro-Dex

What Is Pro-Dex's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Pro-Dex had US$3.77m of debt in September 2020, down from US$4.40m, one year before. However, its balance sheet shows it holds US$7.60m in cash, so it actually has US$3.83m net cash.

How Healthy Is Pro-Dex's Balance Sheet?

According to the last reported balance sheet, Pro-Dex had liabilities of US$4.45m due within 12 months, and liabilities of US$6.30m due beyond 12 months. On the other hand, it had cash of US$7.60m and US$6.14m worth of receivables due within a year. So it can boast US$2.99m more liquid assets than total liabilities.

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

On top of that, Pro-Dex grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Pro-Dex 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Pro-Dex 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. In the last three years, Pro-Dex's free cash flow amounted to 41% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Pro-Dex has US$3.83m in net cash and a decent-looking balance sheet. And we liked the look of last year's 49% year-on-year EBIT growth. So is Pro-Dex's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Pro-Dex is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

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. 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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