Does PTC (NASDAQ:PTC) have a healthy balance sheet?
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, PTC Inc. (NASDAQ:PTC) is in debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
What is PTC’s debt?
The graph below, which you can click on for more details, shows that PTC had debt of US$1.43 billion in June 2022; about the same as the previous year. On the other hand, it has $322.3 million in cash, resulting in a net debt of around $1.10 billion.
A Look at PTC’s Responsibilities
Zooming in on the latest balance sheet data, we can see that PTC had liabilities of US$769.7 million due within 12 months and liabilities of US$1.68 billion due beyond. In return, he had $322.3 million in cash and $473.3 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $1.65 billion.
Of course, PTC has a titanic market capitalization of US$14.7 billion, so those liabilities are probably manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time.
We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
PTC’s net debt of 2.2x EBITDA suggests judicious use of debt. And the attractive interest coverage (EBIT of 8.9 times interest expense) certainly makes not do everything to dispel this impression. We note that PTC has increased its EBIT by 30% over the past year, which should make it easier to pay down debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether PTC can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a company can only repay its debts with cold hard cash, not with book profits. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, PTC has had free cash flow of 97% of its EBIT, which is higher than we would typically expect. This positions him well to pay off debt if desired.
Our point of view
PTC’s conversion of EBIT to free cash flow suggests it can manage its debt as easily as Cristiano Ronaldo could score a goal against an under-14 keeper. And the good news does not stop there, since its EBIT growth rate also confirms this impression! Zooming out, PTC seems to be using debt quite sensibly; and it gets the green light from us. After all, reasonable leverage can increase return on equity. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that PTC displays 2 warning signs in our investment analysis you should know…
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks right away.
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