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. Importantly, PAR Technology Corporation (NYSE:PAR) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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.
What Is PAR Technology's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 PAR Technology had US$59.3m of debt, an increase on US$6.13m, over one year. On the flip side, it has US$58.7m in cash leading to net debt of about US$594.0k.
How Healthy Is PAR Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that PAR Technology had liabilities of US$30.3m due within 12 months and liabilities of US$69.0m due beyond that. Offsetting these obligations, it had cash of US$58.7m as well as receivables valued at US$25.9m due within 12 months. So its liabilities total US$14.7m more than the combination of its cash and short-term receivables.
Of course, PAR Technology has a market capitalization of US$369.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, PAR Technology has virtually no net debt, 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 it is future earnings, more than anything, that will determine PAR Technology'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, PAR Technology saw its revenue drop to US$182m, which is a fall of 14%. We would much prefer see growth.
Not only did PAR Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$12m at the EBIT level. 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. However, it doesn't help that it burned through US$18m of cash over the last year. So to be blunt we think it is risky. For riskier companies like PAR Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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