Does Tenet Fintech Group (CSE:PKK) 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. Importantly, Tenet Fintech Group Inc. (CSE:PKK) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tenet Fintech Group

What Is Tenet Fintech Group's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Tenet Fintech Group had debt of CA$2.50m, up from CA$442.3k in one year. However, it also had CA$1.09m in cash, and so its net debt is CA$1.41m.

How Strong Is Tenet Fintech Group's Balance Sheet?

The latest balance sheet data shows that Tenet Fintech Group had liabilities of CA$17.8m due within a year, and liabilities of CA$7.51m falling due after that. Offsetting these obligations, it had cash of CA$1.09m as well as receivables valued at CA$33.8m due within 12 months. So it actually has CA$9.54m more liquid assets than total liabilities.

This excess liquidity suggests that Tenet Fintech Group is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tenet Fintech Group will need earnings to service that debt. 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.

In the last year Tenet Fintech Group had a loss before interest and tax, and actually shrunk its revenue by 45%, to CA$69m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Tenet Fintech Group'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$21m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Tenet Fintech Group (of which 3 are significant!) you should know about.

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.