Is Petrotx - Limited Partnership (TLV:PTX) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Petrotx - Limited Partnership (TLV:PTX) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See 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 as of September 2021 Petrotx - Limited Partnership had US$11.0m of debt, an increase on US$7.25m, over one year. On the flip side, it has US$8.81m in cash leading to net debt of about US$2.15m.

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

Zooming in on the latest balance sheet data, we can see that Petrotx - Limited Partnership had liabilities of US$8.19m due within 12 months and liabilities of US$15.4m due beyond that. Offsetting these obligations, it had cash of US$8.81m as well as receivables valued at US$1.38m due within 12 months. So it has liabilities totalling US$13.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$6.78m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Petrotx - Limited Partnership would probably need a major re-capitalization if its creditors were to demand repayment.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Petrotx - Limited Partnership has a very low debt to EBITDA ratio of 0.53 so it is strange to see weak interest coverage, with last year's EBIT being only 0.83 times the interest expense. So while we're not necessarily alarmed we think that its debt is far from trivial. Notably, Petrotx - Limited Partnership made a loss at the EBIT level, last year, but improved that to positive EBIT of US$4.5m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Petrotx - Limited Partnership'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. In the last year, Petrotx - Limited Partnership's free cash flow amounted to 32% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

On the face of it, Petrotx - Limited Partnership's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at managing its debt, based on its EBITDA,; that's encouraging. We're quite clear that we consider Petrotx - Limited Partnership to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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 4 warning signs we've spotted with Petrotx - Limited Partnership (including 2 which 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.