We Think Pilbara Minerals (ASX:PLS) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Pilbara Minerals Limited (ASX:PLS) does have debt on its balance sheet. But is this debt a concern to shareholders?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Pilbara Minerals

How Much Debt Does Pilbara Minerals Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Pilbara Minerals had debt of AU$452.5m, up from AU$224.8m in one year. But it also has AU$2.14b in cash to offset that, meaning it has AU$1.69b net cash.

A Look At Pilbara Minerals' Liabilities

Zooming in on the latest balance sheet data, we can see that Pilbara Minerals had liabilities of AU$552.3m due within 12 months and liabilities of AU$639.8m due beyond that. Offsetting these obligations, it had cash of AU$2.14b as well as receivables valued at AU$107.7m due within 12 months. So it actually has AU$1.06b more liquid assets than total liabilities.

This short term liquidity is a sign that Pilbara Minerals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Pilbara Minerals has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Pilbara Minerals's saving grace is its low debt levels, because its EBIT has tanked 25% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Pilbara Minerals'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Pilbara Minerals has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Pilbara Minerals recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Pilbara Minerals has AU$1.69b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 66% of that EBIT to free cash flow, bringing in AU$677m. So we don't have any problem with Pilbara Minerals's use of debt. 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 - Pilbara Minerals has 2 warning signs we think you should be aware of.

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.