Is Park City Group (NASDAQ:PCYG) Using Too Much Debt?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Park City Group, Inc. (NASDAQ:PCYG) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Park City Group
What Is Park City Group's Net Debt?
As you can see below, at the end of March 2021, Park City Group had US$6.00m of debt, up from US$5.00m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$23.2m in cash, so it actually has US$17.2m net cash.
A Look At Park City Group's Liabilities
The latest balance sheet data shows that Park City Group had liabilities of US$10.7m due within a year, and liabilities of US$628.2k falling due after that. Offsetting this, it had US$23.2m in cash and US$6.99m in receivables that were due within 12 months. So it actually has US$18.9m more liquid assets than total liabilities.
This surplus suggests that Park City Group is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Park City Group has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, Park City Group grew its EBIT by 73% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Park City Group'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Park City Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Park City Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Park City Group has net cash of US$17.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$5.2m, being 122% of its EBIT. The bottom line is that we do not find Park City Group's debt levels at all concerning. 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 Park City Group is showing 1 warning sign in our investment analysis , you should know about...
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.
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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