Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Pond Technologies Holdings Inc. (CVE:POND) does carry debt. But the real question is whether this debt is making the company risky.
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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Pond Technologies Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Pond Technologies Holdings had CA$4.17m of debt in September 2021, down from CA$4.77m, one year before. On the flip side, it has CA$2.16m in cash leading to net debt of about CA$2.01m.
How Healthy Is Pond Technologies Holdings' Balance Sheet?
According to the last reported balance sheet, Pond Technologies Holdings had liabilities of CA$2.92m due within 12 months, and liabilities of CA$4.00m due beyond 12 months. Offsetting this, it had CA$2.16m in cash and CA$1.21m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$3.55m.
Given Pond Technologies Holdings has a market capitalization of CA$18.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Pond Technologies Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Pond Technologies Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 105%, to CA$5.8m. So there's no doubt that shareholders are cheering for growth
Despite the top line growth, Pond Technologies Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$3.7m. 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. Another cause for caution is that is bled CA$2.4m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Be aware that Pond Technologies Holdings is showing 6 warning signs in our investment analysis , and 2 of those are 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.
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.
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