We Think PetroTal (TSE:TAL) Can Stay On Top Of Its Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that PetroTal Corp. (TSE:TAL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for PetroTal

How Much Debt Does PetroTal Carry?

The image below, which you can click on for greater detail, shows that PetroTal had debt of US$20.1m at the end of March 2023, a reduction from US$97.1m over a year. But on the other hand it also has US$56.4m in cash, leading to a US$36.3m net cash position.

How Strong Is PetroTal's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PetroTal had liabilities of US$82.8m due within 12 months and liabilities of US$61.9m due beyond that. On the other hand, it had cash of US$56.4m and US$108.8m worth of receivables due within a year. So it can boast US$20.6m more liquid assets than total liabilities.

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

In addition to that, we're happy to report that PetroTal has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. 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 PetroTal'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While PetroTal 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. Looking at the most recent three years, PetroTal recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case PetroTal has US$36.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 58% over the last year. So we don't think PetroTal's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for PetroTal that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.