Is Parkit Enterprise (CVE:PKT) Using Too Much Debt?

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.' 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. As with many other companies Parkit Enterprise Inc. (CVE:PKT) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Parkit Enterprise

How Much Debt Does Parkit Enterprise Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Parkit Enterprise had CA$71.1m of debt, an increase on CA$17.1m, over one year. However, it does have CA$18.6m in cash offsetting this, leading to net debt of about CA$52.5m.

How Healthy Is Parkit Enterprise's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Parkit Enterprise had liabilities of CA$3.51m due within 12 months and liabilities of CA$72.0m due beyond that. Offsetting these obligations, it had cash of CA$18.6m as well as receivables valued at CA$121.5k due within 12 months. So it has liabilities totalling CA$56.7m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Parkit Enterprise is worth CA$243.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Parkit Enterprise can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Parkit Enterprise wasn't profitable at an EBIT level, but managed to grow its revenue by 154%, to CA$10m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Despite the top line growth, Parkit Enterprise still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$1.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CA$727k into a profit. So we do think this stock is quite risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Parkit Enterprise insider transactions.

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.