These 4 Measures Indicate That Perseus Mining (ASX:PRU) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Perseus Mining Limited (ASX:PRU) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Perseus Mining

How Much Debt Does Perseus Mining Carry?

You can click the graphic below for the historical numbers, but it shows that Perseus Mining had AU$72.5m of debt in June 2022, down from AU$133.2m, one year before. But it also has AU$426.8m in cash to offset that, meaning it has AU$354.3m net cash.

A Look At Perseus Mining's Liabilities

We can see from the most recent balance sheet that Perseus Mining had liabilities of AU$168.1m falling due within a year, and liabilities of AU$178.5m due beyond that. Offsetting this, it had AU$426.8m in cash and AU$19.6m in receivables that were due within 12 months. So it can boast AU$99.9m more liquid assets than total liabilities.

This surplus suggests that Perseus Mining has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Perseus Mining has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Perseus Mining grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Perseus Mining'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. Perseus Mining may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Perseus Mining produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Perseus Mining has net cash of AU$354.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 59% year-on-year EBIT growth. So is Perseus Mining's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 3 warning signs for Perseus Mining you should be aware of, and 1 of them is a bit unpleasant.

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.