Pasinex Resources (FRA:PNX) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies Pasinex Resources Limited (FRA:PNX) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Pasinex Resources

What Is Pasinex Resources's Debt?

As you can see below, Pasinex Resources had CA$2.48m of debt at March 2023, down from CA$2.97m a year prior. However, because it has a cash reserve of CA$1.06m, its net debt is less, at about CA$1.41m.

How Strong Is Pasinex Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pasinex Resources had liabilities of CA$4.53m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of CA$1.06m and CA$44.3k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$3.42m.

This deficit is considerable relative to its market capitalization of CA$3.82m, so it does suggest shareholders should keep an eye on Pasinex Resources' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Pasinex Resources 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.

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

Caveat Emptor

Over the last twelve months Pasinex Resources produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$2.9m. 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. For example, we would not want to see a repeat of last year's loss of CA$1.8m. So in short it's a really risky stock. 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. Be aware that Pasinex Resources is showing 3 warning signs in our investment analysis , 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.