Health Check: How Prudently Does Platt Nera International (HKG:1949) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Platt Nera International Limited (HKG:1949) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Platt Nera International

How Much Debt Does Platt Nera International Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Platt Nera International had ฿294.4m of debt, an increase on ฿275.7m, over one year. However, it does have ฿62.1m in cash offsetting this, leading to net debt of about ฿232.3m.

How Healthy Is Platt Nera International's Balance Sheet?

The latest balance sheet data shows that Platt Nera International had liabilities of ฿682.7m due within a year, and liabilities of ฿777.9m falling due after that. Offsetting these obligations, it had cash of ฿62.1m as well as receivables valued at ฿725.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ฿673.2m.

When you consider that this deficiency exceeds the company's ฿476.2m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Platt Nera International'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.

Over 12 months, Platt Nera International made a loss at the EBIT level, and saw its revenue drop to ฿338m, which is a fall of 36%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Platt Nera International's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ฿39m. When we look at that alongside the significant liabilities, we're not particularly confident 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 ฿103m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Platt Nera International (including 2 which are significant) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.