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.' 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. We can see that President Energy Plc (LON:PPC) 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for President Energy
How Much Debt Does President Energy Carry?
As you can see below, at the end of June 2021, President Energy had US$17.3m of debt, up from US$15.0m a year ago. Click the image for more detail. However, it also had US$555.0k in cash, and so its net debt is US$16.7m.
How Healthy Is President Energy's Balance Sheet?
According to the last reported balance sheet, President Energy had liabilities of US$16.5m due within 12 months, and liabilities of US$29.0m due beyond 12 months. On the other hand, it had cash of US$555.0k and US$6.16m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$38.8m.
This deficit is considerable relative to its market capitalization of US$58.0m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine President Energy'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.
Over 12 months, President Energy saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
Caveat Emptor
Over the last twelve months President Energy produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$7.6m. 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. However, it doesn't help that it burned through US$3.7m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 2 warning signs for President Energy 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. 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.
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About AIM:MEN
Molecular Energies
Molecular Energies PLC, together with its subsidiaries, engages in the exploration, evaluation, development, and production of oil and gas properties primarily in South America.
Slightly overvalued with weak fundamentals.