Here's Why Platinum Group Metals (TSE:PTM) Can Afford Some 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. Importantly, Platinum Group Metals Ltd. (TSE:PTM) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Platinum Group Metals

What Is Platinum Group Metals's Debt?

You can click the graphic below for the historical numbers, but it shows that Platinum Group Metals had US$30.0m of debt in May 2021, down from US$36.5m, one year before. However, it does have US$8.99m in cash offsetting this, leading to net debt of about US$21.0m.

A Look At Platinum Group Metals' Liabilities

Zooming in on the latest balance sheet data, we can see that Platinum Group Metals had liabilities of US$2.75m due within 12 months and liabilities of US$30.5m due beyond that. On the other hand, it had cash of US$8.99m and US$251.0k worth of receivables due within a year. So it has liabilities totalling US$24.0m more than its cash and near-term receivables, combined.

Of course, Platinum Group Metals has a market capitalization of US$196.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Platinum Group Metals'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.

Given its lack of meaningful operating revenue, investors are probably hoping that Platinum Group Metals finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Platinum Group Metals produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$7.1m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$7.0m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. For example, we've discovered 3 warning signs for Platinum Group Metals (1 is potentially serious!) that you should be aware of before investing here.

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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