Is Peria Karamalai Tea and Produce (NSE:PKTEA) Using Debt Sensibly?

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 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, The Peria Karamalai Tea and Produce Company Limited (NSE:PKTEA) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Peria Karamalai Tea and Produce

What Is Peria Karamalai Tea and Produce's Debt?

You can click the graphic below for the historical numbers, but it shows that Peria Karamalai Tea and Produce had ₹196.8m of debt in September 2022, down from ₹478.5m, one year before. But it also has ₹258.7m in cash to offset that, meaning it has ₹61.9m net cash.

How Strong Is Peria Karamalai Tea and Produce's Balance Sheet?

We can see from the most recent balance sheet that Peria Karamalai Tea and Produce had liabilities of ₹200.0m falling due within a year, and liabilities of ₹120.3m due beyond that. Offsetting these obligations, it had cash of ₹258.7m as well as receivables valued at ₹272.2m due within 12 months. So it can boast ₹210.7m more liquid assets than total liabilities.

It's good to see that Peria Karamalai Tea and Produce has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Peria Karamalai Tea and Produce has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Peria Karamalai Tea and Produce'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.

Over 12 months, Peria Karamalai Tea and Produce reported revenue of ₹513m, which is a gain of 4.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Peria Karamalai Tea and Produce?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Peria Karamalai Tea and Produce lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₹270m of cash and made a loss of ₹53m. With only ₹61.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example Peria Karamalai Tea and Produce has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.