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.' 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, Penta Gold Limited (NSE:PENTAGOLD) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Penta Gold
What Is Penta Gold's Debt?
The chart below, which you can click on for greater detail, shows that Penta Gold had ₹1.21b in debt in September 2021; about the same as the year before. And it doesn't have much cash, so its net debt is about the same.
How Healthy Is Penta Gold's Balance Sheet?
We can see from the most recent balance sheet that Penta Gold had liabilities of ₹3.92b falling due within a year, and liabilities of ₹15.9m due beyond that. Offsetting these obligations, it had cash of ₹1.79m as well as receivables valued at ₹1.63b due within 12 months. So its liabilities total ₹2.30b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the ₹1.44b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Penta Gold 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 it is Penta Gold'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.
Over 12 months, Penta Gold made a loss at the EBIT level, and saw its revenue drop to ₹51m, which is a fall of 99%. That makes us nervous, to say the least.
Caveat Emptor
While Penta Gold's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹26m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₹505k in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Penta Gold has 5 warning signs (and 4 which make us uncomfortable) we think you should know about.
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.
About NSEI:PENTAGOLD
Low with weak fundamentals.
