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PWR Holdings (ASX:PWH) Has A Rock Solid Balance Sheet

Simply Wall St

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. As with many other companies PWR Holdings Limited (ASX:PWH) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for PWR Holdings

What Is PWR Holdings's Net Debt?

As you can see below, at the end of June 2019, PWR Holdings had AU$3.42m of debt, up from AU$483.0k a year ago. Click the image for more detail. But it also has AU$20.5m in cash to offset that, meaning it has AU$17.1m net cash.

ASX:PWH Historical Debt, October 11th 2019
ASX:PWH Historical Debt, October 11th 2019

How Healthy Is PWR Holdings's Balance Sheet?

The latest balance sheet data shows that PWR Holdings had liabilities of AU$8.27m due within a year, and liabilities of AU$3.71m falling due after that. Offsetting these obligations, it had cash of AU$20.5m as well as receivables valued at AU$4.69m due within 12 months. So it actually has AU$13.2m more liquid assets than total liabilities.

This short term liquidity is a sign that PWR Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, PWR Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that PWR Holdings has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine PWR Holdings'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While PWR Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, PWR Holdings recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case PWR Holdings has AU$17.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 22% over the last year. So we don't think PWR Holdings's use of debt is risky. We'd be very excited to see if PWR Holdings insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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. Thank you for reading.