Is Party City Holdco (NYSE:PRTY) Weighed On By Its Debt Load?

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 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. We can see that Party City Holdco Inc. (NYSE:PRTY) does use debt in its business. But the more important question is: how much risk is that debt creating?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Party City Holdco

What Is Party City Holdco's Debt?

You can click the graphic below for the historical numbers, but it shows that Party City Holdco had US$1.64b of debt in September 2020, down from US$2.03b, one year before. On the flip side, it has US$170.6m in cash leading to net debt of about US$1.47b.

A Look At Party City Holdco's Liabilities

Zooming in on the latest balance sheet data, we can see that Party City Holdco had liabilities of US$895.3m due within 12 months and liabilities of US$2.08b due beyond that. Offsetting this, it had US$170.6m in cash and US$149.8m in receivables that were due within 12 months. So it has liabilities totalling US$2.65b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$881.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Party City Holdco would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Party City Holdco's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Party City Holdco made a loss at the EBIT level, and saw its revenue drop to US$1.9b, which is a fall of 20%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Party City Holdco's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$6.9m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of US$701m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. For instance, we've identified 4 warning signs for Party City Holdco that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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