Is Platt Nera International (HKG:1949) Using Too Much Debt?

Warren Buffett famously said, '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. Importantly, Platt Nera International Limited (HKG:1949) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Platt Nera International

What Is Platt Nera International's Net Debt?

As you can see below, at the end of June 2021, Platt Nera International had ฿284.4m of debt, up from ฿253.4m a year ago. Click the image for more detail. However, it also had ฿33.3m in cash, and so its net debt is ฿251.1m.

A Look At Platt Nera International's Liabilities

We can see from the most recent balance sheet that Platt Nera International had liabilities of ฿598.4m falling due within a year, and liabilities of ฿845.6m due beyond that. Offsetting this, it had ฿33.3m in cash and ฿686.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ฿724.5m.

This deficit casts a shadow over the ฿360.7m 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, Platt Nera International would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Platt Nera International will need earnings to service that debt. 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 had a loss before interest and tax, and actually shrunk its revenue by 54%, to ฿324m. 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). Its EBIT loss was a whopping ฿162m. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ฿21m and the profit of ฿41m. So one might argue that there's still a chance it can get things on the right track. 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. We've identified 5 warning signs with Platt Nera International (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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