Is PROS Holdings (NYSE:PRO) A Risky Investment?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, PROS Holdings, Inc. (NYSE:PRO) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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.
View our latest analysis for PROS Holdings
What Is PROS Holdings's Net Debt?
As you can see below, PROS Holdings had US$110.7m of debt at December 2019, down from US$225.2m a year prior. But on the other hand it also has US$306.1m in cash, leading to a US$195.4m net cash position.
How Strong Is PROS Holdings's Balance Sheet?
We can see from the most recent balance sheet that PROS Holdings had liabilities of US$196.1m falling due within a year, and liabilities of US$152.2m due beyond that. Offsetting this, it had US$306.1m in cash and US$65.1m in receivables that were due within 12 months. So it actually has US$22.8m more liquid assets than total liabilities.
Having regard to PROS Holdings's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.23b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, PROS Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 PROS 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.
In the last year PROS Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to US$250m. With any luck the company will be able to grow its way to profitability.
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 in the last year PROS Holdings had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$1.5m of cash and made a loss of US$69m. But the saving grace is the US$195.4m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, PROS Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for PROS Holdings that you should be aware of before investing here.
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.
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.
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