Here's Why Pilot Energy (ASX:PGY) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Pilot Energy Limited (ASX:PGY) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Pilot Energy

What Is Pilot Energy's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Pilot Energy had debt of AU$6.05m, up from none in one year. However, because it has a cash reserve of AU$1.94m, its net debt is less, at about AU$4.11m.

How Healthy Is Pilot Energy's Balance Sheet?

According to the last reported balance sheet, Pilot Energy had liabilities of AU$1.74m due within 12 months, and liabilities of AU$6.15m due beyond 12 months. Offsetting these obligations, it had cash of AU$1.94m as well as receivables valued at AU$437.1k due within 12 months. So it has liabilities totalling AU$5.51m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Pilot Energy is worth AU$23.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Pilot Energy will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Pilot Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 53%, to AU$572k. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Importantly, Pilot Energy had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$2.5m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$6.7m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Pilot Energy (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com