Is Proact IT Group (STO:PACT) a risky investment?

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Proact IT Group AB (publisher) (STO:PACT) uses debt. But does this debt worry shareholders?

What risk does debt carry?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.

Discover our latest analysis for Proact IT Group

What is Proact IT Group’s net debt?

As you can see below, at the end of March 2022, Proact IT Group had a debt of 464.7 million kr, compared to 266.4 million kr a year ago. Click on the image for more details. However, as he has a cash reserve of 418.3 million kr, his net debt is lower at around 46.4 million kr.

OM:PACT Debt to Equity History June 14, 2022

How healthy is Proact IT Group’s balance sheet?

The latest balance sheet data shows that Proact IT Group had liabilities of kr 1.61 billion falling due within one year, and liabilities of kr 1.14 billion falling due thereafter. In return, he had 418.3 million kr in cash and 1.27 billion kr in debt due within 12 months. Thus, its liabilities total kr 1.06 billion more than the combination of its cash and short-term receivables.

Proact IT Group has a market capitalization of kr 1.81 billion, so it could very likely raise funds to improve its balance sheet, should the need arise. But we definitely want to keep our eyes peeled for indications that its debt is too risky.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

Proact IT Group’s net debt is only 0.18 times its EBITDA. And its EBIT covers its interest charges 16.8 times. So we’re pretty relaxed about his super-conservative use of debt. But the flip side is that Proact IT Group has seen its EBIT drop 2.3% over the past year. This type of decline, if it continues, will obviously make the debt more difficult to manage. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Proact IT Group’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

But our last consideration is also important, because a company cannot pay off its debts with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Proact IT Group has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our point of view

Interest coverage from Proact IT Group suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But truth be told, we think his total passive level undermines that impression a bit. Looking at all of the aforementioned factors together, it seems to us that Proact IT Group can manage its debt quite comfortably. On the plus side, this leverage can increase shareholder returns, but the potential downside is greater risk of loss, so it’s worth keeping an eye on the balance sheet. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. To this end, you should be aware of the 1 warning sign we spotted with Proact IT Group.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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