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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. 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. We can see that Potbelly Corporation (NASDAQ:PBPB) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Potbelly
How Much Debt Does Potbelly Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2020 Potbelly had US$39.8m of debt, an increase on none, over one year. But on the other hand it also has US$45.8m in cash, leading to a US$6.03m net cash position.
How Healthy Is Potbelly's Balance Sheet?
According to the last reported balance sheet, Potbelly had liabilities of US$88.7m due within 12 months, and liabilities of US$206.2m due beyond 12 months. Offsetting this, it had US$45.8m in cash and US$2.65m in receivables that were due within 12 months. So its liabilities total US$246.4m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the US$56.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Potbelly would probably need a major re-capitalization if its creditors were to demand repayment. Given that Potbelly has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Potbelly can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.