Is Piedmont Lithium (ASX:PLL) Using Debt Sensibly?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Piedmont Lithium Inc. (ASX:PLL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Piedmont Lithium

How Much Debt Does Piedmont Lithium Carry?

As you can see below, Piedmont Lithium had US$2.31m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$142.7m in cash offsetting this, leading to net cash of US$140.3m.

How Healthy Is Piedmont Lithium's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Piedmont Lithium had liabilities of US$6.21m due within 12 months and liabilities of US$1.23m due beyond that. On the other hand, it had cash of US$142.7m and US$189.2k worth of receivables due within a year. So it actually has US$135.4m more liquid assets than total liabilities.

This excess liquidity suggests that Piedmont Lithium is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Piedmont Lithium has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Piedmont Lithium'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.

Since Piedmont Lithium has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Piedmont Lithium?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Piedmont Lithium lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$34m and booked a US$20m accounting loss. With only US$140.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 3 warning signs with Piedmont Lithium (at least 1 which is significant) , and understanding them should be part of your investment process.

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.

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.

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