Is PROS Holdings (NYSE:PRO) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies PROS Holdings, Inc. (NYSE:PRO) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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.

Check out our latest analysis for PROS Holdings

What Is PROS Holdings's Net Debt?

As you can see below, at the end of September 2021, PROS Holdings had US$287.9m of debt, up from US$214.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$308.6m in cash, so it actually has US$20.7m net cash.

How Healthy Is PROS Holdings' Balance Sheet?

We can see from the most recent balance sheet that PROS Holdings had liabilities of US$148.6m falling due within a year, and liabilities of US$334.5m due beyond that. Offsetting this, it had US$308.6m in cash and US$43.1m in receivables that were due within 12 months. So its liabilities total US$131.3m more than the combination of its cash and short-term receivables.

Since publicly traded PROS Holdings shares are worth a total of US$1.59b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, PROS Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if PROS Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year PROS Holdings had a loss before interest and tax, and actually shrunk its revenue by 4.0%, to US$247m. That's not what we would hope to see.

So How Risky Is PROS Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months PROS Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$13m and booked a US$76m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$20.7m. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should be aware of the 3 warning signs we've spotted with PROS Holdings .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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