Yahoo Finance Is ProntoForms (CVE:PFM) Using Too Much Debt?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that ProntoForms Corporation (CVE:PFM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for ProntoForms
How Much Debt Does ProntoForms Carry?
The image below, which you can click on for greater detail, shows that at September 2019 ProntoForms had debt of US$2.62m, up from US$2.5 in one year. But on the other hand it also has US$5.70m in cash, leading to a US$3.08m net cash position.
How Strong Is ProntoForms's Balance Sheet?
We can see from the most recent balance sheet that ProntoForms had liabilities of US$5.20m falling due within a year, and liabilities of US$3.54m due beyond that. Offsetting this, it had US$5.70m in cash and US$2.45m in receivables that were due within 12 months. So its liabilities total US$586.9k more than the combination of its cash and short-term receivables.
Having regard to ProntoForms's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$52.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, ProntoForms boasts net cash, so it's fair to say it does not have a heavy debt load! 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 ProntoForms 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.
In the last year ProntoForms wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to US$14m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is ProntoForms?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that ProntoForms had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$1.2m and booked a US$1.9m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$3.08m. That means it could keep spending at its current rate for more than two years. ProntoForms's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 ProntoForms insider transactions.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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