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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 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. PCTEL, Inc. (NASDAQ:PCTI) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does PCTEL Carry?
The image below, which you can click on for greater detail, shows that PCTEL had debt of US$197.0k at the end of March 2019, a reduction from US$253.0k over a year. But on the other hand it also has US$35.0m in cash, leading to a US$34.8m net cash position.
How Healthy Is PCTEL’s Balance Sheet?
We can see from the most recent balance sheet that PCTEL had liabilities of US$13.5m falling due within a year, and liabilities of US$868.0k due beyond that. On the other hand, it had cash of US$35.0m and US$16.4m worth of receivables due within a year. So it can boast US$37.1m more liquid assets than total liabilities.
This surplus liquidity suggests that PCTEL’s balance sheet could take a hit just as well as Homer Simpson’s head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. PCTEL boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine PCTEL’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.
In the last year PCTEL actually shrunk its revenue by 9.3%, to US$82m. That’s not what we would hope to see.
So How Risky Is PCTEL?
Although PCTEL had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$4.9m. So although it is loss-making, it doesn’t seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we’re don’t find the investment opportunity particularly compelling. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting PCTEL insider transactions.
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.
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