Is Progressive Planet Solutions (CVE:PLAN) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Progressive Planet Solutions Inc. (CVE:PLAN) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

View our latest analysis for Progressive Planet Solutions

What Is Progressive Planet Solutions's Net Debt?

As you can see below, at the end of October 2022, Progressive Planet Solutions had CA$9.60m of debt, up from CA$229.6k a year ago. Click the image for more detail. On the flip side, it has CA$1.20m in cash leading to net debt of about CA$8.40m.

How Healthy Is Progressive Planet Solutions' Balance Sheet?

According to the last reported balance sheet, Progressive Planet Solutions had liabilities of CA$3.81m due within 12 months, and liabilities of CA$12.4m due beyond 12 months. Offsetting this, it had CA$1.20m in cash and CA$2.31m in receivables that were due within 12 months. So its liabilities total CA$12.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Progressive Planet Solutions has a market capitalization of CA$25.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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 it is Progressive Planet Solutions'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.

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

Importantly, Progressive Planet Solutions had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$3.4m. 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. 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 CA$4.1m 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 5 warning signs with Progressive Planet Solutions (at least 3 which shouldn't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.