Is Po Valley Energy (ASX:PVE) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Po Valley Energy Limited (ASX:PVE) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Po Valley Energy

What Is Po Valley Energy's Net Debt?

As you can see below, at the end of December 2020, Po Valley Energy had €3.58m of debt, up from €2.84m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

A Look At Po Valley Energy's Liabilities

According to the balance sheet data, Po Valley Energy had liabilities of €4.88m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of €44.1k as well as receivables valued at €86.6k due within 12 months. So it has liabilities totalling €4.75m more than its cash and near-term receivables, combined.

Po Valley Energy has a market capitalization of €12.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Po Valley Energy's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Given its lack of meaningful operating revenue, Po Valley Energy shareholders no doubt hope it can fund itself until it can sell some combustibles.

Caveat Emptor

Over the last twelve months Po Valley Energy produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €838k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €775k of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 4 warning signs for Po Valley Energy (3 make us uncomfortable!) that you should be aware of before investing here.

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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