Peak Fintech Group (CSE:PKK) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

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.' 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. We can see that Peak Fintech Group Inc. (CSE:PKK) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Peak Fintech Group

What Is Peak Fintech Group's Debt?

As you can see below, Peak Fintech Group had CA$2.02m of debt at December 2020, down from CA$5.54m a year prior. However, its balance sheet shows it holds CA$5.87m in cash, so it actually has CA$3.85m net cash.

A Look At Peak Fintech Group's Liabilities

We can see from the most recent balance sheet that Peak Fintech Group had liabilities of CA$28.3m falling due within a year, and liabilities of CA$420.7k due beyond that. Offsetting these obligations, it had cash of CA$5.87m as well as receivables valued at CA$44.3m due within 12 months. So it can boast CA$21.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Peak Fintech Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Peak Fintech Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Peak Fintech Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Peak Fintech Group reported revenue of CA$43m, which is a gain of 264%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Peak Fintech Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Peak Fintech Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$5.0m and booked a CA$6.6m accounting loss. But at least it has CA$3.85m on the balance sheet to spend on growth, near-term. Importantly, Peak Fintech Group's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Peak Fintech Group (2 shouldn't be ignored!) that you should be aware of before investing here.

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. 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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