Health Check: How Prudently Does Petrotx - Limited Partnership (TLV:PTX) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Petrotx - Limited Partnership (TLV:PTX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Petrotx - Limited Partnership

What Is Petrotx - Limited Partnership's Debt?

You can click the graphic below for the historical numbers, but it shows that Petrotx - Limited Partnership had US$7.25m of debt in September 2020, down from US$11.4m, one year before. However, because it has a cash reserve of US$1.64m, its net debt is less, at about US$5.61m.

How Strong Is Petrotx - Limited Partnership's Balance Sheet?

According to the last reported balance sheet, Petrotx - Limited Partnership had liabilities of US$5.31m due within 12 months, and liabilities of US$12.3m due beyond 12 months. Offsetting these obligations, it had cash of US$1.64m as well as receivables valued at US$1.33m due within 12 months. So it has liabilities totalling US$14.6m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$3.77m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Petrotx - Limited Partnership 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 you can't view debt in total isolation; since Petrotx - Limited Partnership 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.

Over 12 months, Petrotx - Limited Partnership reported revenue of US$8.2m, which is a gain of 4.5%, 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, Petrotx - Limited Partnership had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$3.4m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of US$4.4m in the last year. So we think this stock is quite risky. We'd prefer to pass. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Petrotx - Limited Partnership you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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