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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Piedmont Lithium Inc. (ASX:PLL) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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

What Is Piedmont Lithium's Net Debt?

The image below, which you can click on for greater detail, shows that Piedmont Lithium had debt of US$2.36m at the end of September 2021, a reduction from US$2.68m over a year. However, its balance sheet shows it holds US$82.0m in cash, so it actually has US$79.6m net cash.

How Healthy Is Piedmont Lithium's Balance Sheet?

The latest balance sheet data shows that Piedmont Lithium had liabilities of US$7.93m due within a year, and liabilities of US$1.07m falling due after that. On the other hand, it had cash of US$82.0m and US$189.2k worth of receivables due within a year. So it can boast US$73.1m more liquid assets than total liabilities.

This surplus suggests that Piedmont Lithium has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Piedmont Lithium lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$48m of cash and made a loss of US$29m. With only US$79.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 2 warning signs for Piedmont Lithium (1 is potentially serious!) that you should be aware of before investing here.

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.