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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 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. Importantly, PAR Technology Corporation (NYSE:PAR) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does PAR Technology Carry?
The image below, which you can click on for greater detail, shows that at December 2020 PAR Technology had debt of US$106.5m, up from US$63.0m in one year. But on the other hand it also has US$180.7m in cash, leading to a US$74.2m net cash position.
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$40.0m due within 12 months and liabilities of US$115.4m due beyond that. Offsetting this, it had US$180.7m in cash and US$43.0m in receivables that were due within 12 months. So it actually has US$68.3m more liquid assets than total liabilities.
This short term liquidity is a sign that PAR Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, PAR Technology 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 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 reported revenue of US$214m, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is PAR Technology?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that PAR Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$30m of cash and made a loss of US$37m. However, it has net cash of US$74.2m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the 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. Be aware that PAR Technology is showing 2 warning signs in our investment analysis , you should know about...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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. 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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