Is Paladin Energy (ASX:PDN) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Paladin Energy Ltd (ASX:PDN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Paladin Energy

What Is Paladin Energy's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Paladin Energy had debt of US$84.0m, up from US$73.3m in one year. But it also has US$163.2m in cash to offset that, meaning it has US$79.2m net cash.

How Strong Is Paladin Energy's Balance Sheet?

We can see from the most recent balance sheet that Paladin Energy had liabilities of US$3.50m falling due within a year, and liabilities of US$125.0m due beyond that. Offsetting this, it had US$163.2m in cash and US$5.96m in receivables that were due within 12 months. So it can boast US$40.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Paladin Energy could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Paladin Energy has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Paladin Energy'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.

Over 12 months, Paladin Energy reported revenue of US$4.7m, which is a gain of 57%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Paladin Energy?

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 Paladin Energy had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$8.9m and booked a US$28m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$79.2m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Paladin Energy may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Paladin Energy you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.