Is Platt Nera International (HKG:1949) Using Debt In A Risky Way?

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.' 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. Importantly, Platt Nera International Limited (HKG:1949) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 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 Platt Nera International

What Is Platt Nera International's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Platt Nera International had debt of ฿401.7m, up from ฿284.4m in one year. However, it does have ฿52.6m in cash offsetting this, leading to net debt of about ฿349.0m.

A Look At Platt Nera International's Liabilities

Zooming in on the latest balance sheet data, we can see that Platt Nera International had liabilities of ฿675.6m due within 12 months and liabilities of ฿659.4m due beyond that. Offsetting this, it had ฿52.6m in cash and ฿700.0m in receivables that were due within 12 months. So its liabilities total ฿582.4m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ฿447.5m, we think shareholders really should watch Platt Nera International's debt levels, like a parent watching their child ride a bike for the first time. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Platt Nera International wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to ฿360m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Platt Nera International had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ฿33m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ฿99m 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Platt Nera International is showing 3 warning signs in our investment analysis , and 2 of those are significant...

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.