Does PAR Technology (NYSE:PAR) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that PAR Technology Corporation (NYSE:PAR) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 PAR Technology

What Is PAR Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 PAR Technology had US$466.7m of debt, an increase on US$390.8m, over one year. However, it also had US$118.4m in cash, and so its net debt is US$348.4m.

How Healthy Is PAR Technology's Balance Sheet?

According to the last reported balance sheet, PAR Technology had liabilities of US$109.3m due within 12 months, and liabilities of US$497.2m due beyond 12 months. Offsetting these obligations, it had cash of US$118.4m as well as receivables valued at US$60.3m due within 12 months. So its liabilities total US$427.9m more than the combination of its cash and short-term receivables.

Since publicly traded PAR Technology shares are worth a total of US$2.68b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if PAR Technology 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 PAR Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 49%, to US$454m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, PAR Technology still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$65m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$35m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that PAR Technology is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.