Does Progressive Planet Solutions (CVE:PLAN) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Progressive Planet Solutions Inc. (CVE:PLAN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Progressive Planet Solutions

How Much Debt Does Progressive Planet Solutions Carry?

The image below, which you can click on for greater detail, shows that at April 2022 Progressive Planet Solutions had debt of CA$10.1m, up from CA$248.0k in one year. However, it also had CA$1.77m in cash, and so its net debt is CA$8.36m.

How Healthy Is Progressive Planet Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Progressive Planet Solutions had liabilities of CA$4.31m due within 12 months and liabilities of CA$12.7m due beyond that. Offsetting these obligations, it had cash of CA$1.77m as well as receivables valued at CA$2.26m due within 12 months. So its liabilities total CA$13.0m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Progressive Planet Solutions is worth CA$30.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Progressive Planet Solutions 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.

While it hasn't made a profit, at least Progressive Planet Solutions booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Over the last twelve months Progressive Planet Solutions produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$4.4m. 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. Another cause for caution is that is bled CA$3.9m in negative free cash flow over the last twelve months. 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. Be aware that Progressive Planet Solutions is showing 5 warning signs in our investment analysis , and 3 of those are a bit unpleasant...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.