Pure Foods Tasmania (ASX:PFT) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Pure Foods Tasmania Limited (ASX:PFT) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Pure Foods Tasmania

What Is Pure Foods Tasmania's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Pure Foods Tasmania had AU$4.11m of debt, an increase on AU$1.36m, over one year. However, it does have AU$5.56m in cash offsetting this, leading to net cash of AU$1.46m.

How Healthy Is Pure Foods Tasmania's Balance Sheet?

The latest balance sheet data shows that Pure Foods Tasmania had liabilities of AU$4.44m due within a year, and liabilities of AU$3.26m falling due after that. Offsetting this, it had AU$5.56m in cash and AU$1.05m in receivables that were due within 12 months. So its liabilities total AU$1.08m more than the combination of its cash and short-term receivables.

Given Pure Foods Tasmania has a market capitalization of AU$15.4m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Pure Foods Tasmania boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Pure Foods Tasmania will need earnings to service that debt. 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.

Over 12 months, Pure Foods Tasmania made a loss at the EBIT level, and saw its revenue drop to AU$8.7m, which is a fall of 7.7%. That's not what we would hope to see.

So How Risky Is Pure Foods Tasmania?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Pure Foods Tasmania had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$4.1m of cash and made a loss of AU$3.1m. Given it only has net cash of AU$1.46m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Pure Foods Tasmania (of which 2 are potentially serious!) you should know about.

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.

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

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.