Does Petra Diamonds (LON:PDL) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Petra Diamonds Limited (LON:PDL) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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 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 Petra Diamonds

What Is Petra Diamonds's Debt?

The image below, which you can click on for greater detail, shows that Petra Diamonds had debt of US$267.0m at the end of December 2024, a reduction from US$295.8m over a year. On the flip side, it has US$51.0m in cash leading to net debt of about US$216.0m.

How Healthy Is Petra Diamonds' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Petra Diamonds had liabilities of US$416.0m due within 12 months and liabilities of US$90.0m due beyond that. Offsetting this, it had US$51.0m in cash and US$6.00m in receivables that were due within 12 months. So it has liabilities totalling US$449.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$58.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Petra Diamonds would likely require a major re-capitalisation if it had to pay its creditors today. 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 Petra Diamonds'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, Petra Diamonds reported revenue of US$318m, which is a gain of 4.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Petra Diamonds had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$139m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the fact is that it incinerated US$2.0m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. The balance sheet is clearly the area to focus on when you are analysing debt. 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 2 warning signs for Petra Diamonds (of which 1 is a bit unpleasant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.