We Think Pond Technologies Holdings (CVE:POND) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Pond Technologies Holdings Inc. (CVE:POND) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Pond Technologies Holdings

How Much Debt Does Pond Technologies Holdings Carry?

As you can see below, Pond Technologies Holdings had CA$3.85m of debt at March 2022, down from CA$4.26m a year prior. However, because it has a cash reserve of CA$933.0k, its net debt is less, at about CA$2.92m.

How Healthy Is Pond Technologies Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pond Technologies Holdings had liabilities of CA$2.82m due within 12 months and liabilities of CA$3.58m due beyond that. On the other hand, it had cash of CA$933.0k and CA$1.23m worth of receivables due within a year. So its liabilities total CA$4.24m more than the combination of its cash and short-term receivables.

Pond Technologies Holdings has a market capitalization of CA$7.16m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Pond Technologies Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Pond Technologies Holdings had a loss before interest and tax, and actually shrunk its revenue by 11%, to CA$4.7m. We would much prefer see growth.

Caveat Emptor

Not only did Pond Technologies Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CA$3.6m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$3.2m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example Pond Technologies Holdings has 6 warning signs (and 3 which don't sit too well with us) we think you should know about.

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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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.