Is Petrotx - Limited Partnership (TLV:PTX) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Petrotx - Limited Partnership (TLV:PTX) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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.

View our latest analysis for Petrotx - Limited Partnership

What Is Petrotx - Limited Partnership's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Petrotx - Limited Partnership had debt of US$11.6m, up from US$10.5m in one year. However, because it has a cash reserve of US$10.5m, its net debt is less, at about US$1.08m.

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

According to the last reported balance sheet, Petrotx - Limited Partnership had liabilities of US$5.92m due within 12 months, and liabilities of US$16.3m due beyond 12 months. Offsetting these obligations, it had cash of US$10.5m as well as receivables valued at US$1.80m due within 12 months. So its liabilities total US$9.93m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$4.39m 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. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Petrotx - Limited Partnership had a loss before interest and tax, and actually shrunk its revenue by 9.9%, to US$7.9m. We would much prefer see growth.

Caveat Emptor

Importantly, Petrotx - Limited Partnership had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$524k at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of US$1.2m. In the meantime, we consider the stock to be risky. 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 3 warning signs with Petrotx - Limited Partnership , and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. 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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