Is Penneo (CPH:PENNEO) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Penneo A/S (CPH:PENNEO) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Penneo

What Is Penneo's Debt?

The image below, which you can click on for greater detail, shows that Penneo had debt of kr.13.5m at the end of June 2023, a reduction from kr.14.5m over a year. But on the other hand it also has kr.41.0m in cash, leading to a kr.27.5m net cash position.

A Look At Penneo's Liabilities

According to the last reported balance sheet, Penneo had liabilities of kr.16.3m due within 12 months, and liabilities of kr.24.6m due beyond 12 months. On the other hand, it had cash of kr.41.0m and kr.17.3m worth of receivables due within a year. So it actually has kr.17.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Penneo could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Penneo boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Penneo's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Penneo wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to kr.80m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Penneo?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Penneo lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of kr.26m and booked a kr.23m accounting loss. With only kr.27.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Penneo's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Penneo , 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.