Is Persta Resources (HKG:3395) Weighed On By Its Debt Load?

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 Persta Resources Inc. (HKG:3395) makes use of debt. But should shareholders be worried about its use of debt?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Persta Resources

What Is Persta Resources's Net Debt?

As you can see below, at the end of December 2020, Persta Resources had CA$25.7m of debt, up from CA$22.7m a year ago. Click the image for more detail. However, because it has a cash reserve of CA$1.07m, its net debt is less, at about CA$24.6m.

How Healthy Is Persta Resources' Balance Sheet?

We can see from the most recent balance sheet that Persta Resources had liabilities of CA$32.8m falling due within a year, and liabilities of CA$6.68m due beyond that. Offsetting these obligations, it had cash of CA$1.07m as well as receivables valued at CA$1.99m due within 12 months. So it has liabilities totalling CA$36.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$21.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Persta Resources would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Persta Resources's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Persta Resources wasn't profitable at an EBIT level, but managed to grow its revenue by 6.3%, to CA$13m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Persta Resources produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$6.6m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CA$4.5m over the last twelve months. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with Persta Resources (including 2 which make us uncomfortable) .

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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This article by Simply Wall St is general in nature. 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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