Does Pure Foods Tasmania (ASX:PFT) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Pure Foods Tasmania Limited (ASX:PFT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Pure Foods Tasmania

What Is Pure Foods Tasmania's Net Debt?

As you can see below, at the end of June 2023, Pure Foods Tasmania had AU$3.93m of debt, up from AU$1.25m a year ago. Click the image for more detail. However, it does have AU$3.47m in cash offsetting this, leading to net debt of about AU$464.8k.

How Strong Is Pure Foods Tasmania's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pure Foods Tasmania had liabilities of AU$5.12m due within 12 months and liabilities of AU$2.47m due beyond that. On the other hand, it had cash of AU$3.47m and AU$1.85m worth of receivables due within a year. So it has liabilities totalling AU$2.27m more than its cash and near-term receivables, combined.

Pure Foods Tasmania has a market capitalization of AU$9.35m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Pure Foods Tasmania's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Pure Foods Tasmania had a loss before interest and tax, and actually shrunk its revenue by 12%, to AU$8.7m. That's not what we would hope to see.

Caveat Emptor

Not only did Pure Foods Tasmania's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping AU$2.0m. 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. 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$3.7m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. 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 3 warning signs for Pure Foods Tasmania 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.