Health Check: How Prudently Does PROS Holdings (NYSE:PRO) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies PROS Holdings, Inc. (NYSE:PRO) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for PROS Holdings

How Much Debt Does PROS Holdings Carry?

The image below, which you can click on for greater detail, shows that PROS Holdings had debt of US$114.1m at the end of June 2020, a reduction from US$219.5m over a year. But on the other hand it also has US$220.2m in cash, leading to a US$106.0m net cash position.

A Look At PROS Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that PROS Holdings had liabilities of US$158.7m due within 12 months and liabilities of US$150.5m due beyond that. On the other hand, it had cash of US$220.2m and US$54.7m worth of receivables due within a year. So it has liabilities totalling US$34.3m more than its cash and near-term receivables, combined.

Of course, PROS Holdings has a market capitalization of US$1.39b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, PROS Holdings boasts net cash, 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 PROS Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year PROS Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to US$260m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is PROS Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months PROS Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$54m of cash and made a loss of US$75m. But the saving grace is the US$106.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - PROS Holdings has 3 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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