Here's Why Pond Technologies Holdings (CVE:POND) Can Afford Some 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.' 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. We can see that Pond Technologies Holdings Inc. (CVE:POND) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Pond Technologies Holdings

How Much Debt Does Pond Technologies Holdings Carry?

The image below, which you can click on for greater detail, shows that Pond Technologies Holdings had debt of CA$4.26m at the end of March 2021, a reduction from CA$4.72m over a year. However, it does have CA$1.48m in cash offsetting this, leading to net debt of about CA$2.78m.

A Look At Pond Technologies Holdings' Liabilities

We can see from the most recent balance sheet that Pond Technologies Holdings had liabilities of CA$2.67m falling due within a year, and liabilities of CA$4.15m due beyond that. Offsetting this, it had CA$1.48m in cash and CA$1.37m in receivables that were due within 12 months. So its liabilities total CA$3.97m more than the combination of its cash and short-term receivables.

Since publicly traded Pond Technologies Holdings shares are worth a total of CA$30.2m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Pond Technologies Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Pond Technologies Holdings made a loss at the EBIT level, and saw its revenue drop to CA$5.2m, which is a fall of 6.7%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Pond Technologies Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$3.3m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$2.7m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Pond Technologies Holdings (at least 3 which are a bit concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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