President Energy (LON:PPC) Is Carrying A Fair Bit Of Debt

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 President Energy Plc (LON:PPC) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for President Energy

What Is President Energy's Net Debt?

As you can see below, President Energy had US$15.0m of debt at June 2020, down from US$27.9m a year prior. On the flip side, it has US$3.61m in cash leading to net debt of about US$11.3m.

How Strong Is President Energy's Balance Sheet?

We can see from the most recent balance sheet that President Energy had liabilities of US$9.97m falling due within a year, and liabilities of US$23.4m due beyond that. Offsetting this, it had US$3.61m in cash and US$4.22m in receivables that were due within 12 months. So its liabilities total US$25.6m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$41.8m, so it does suggest shareholders should keep an eye on President Energy's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if President Energy 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, President Energy made a loss at the EBIT level, and saw its revenue drop to US$31m, which is a fall of 36%. To be frank that doesn't bode well.

Caveat Emptor

While President Energy's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$95m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of US$91m into a profit. So in short it's a really risky stock. 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. Case in point: We've spotted 3 warning signs for President Energy you should be aware of, and 1 of them is potentially serious.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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