Is Patentus (WSE:PAT) A Risky Investment?

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 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. We can see that Patentus S.A. (WSE:PAT) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Patentus

What Is Patentus's Debt?

As you can see below, at the end of March 2021, Patentus had zł17.2m of debt, up from zł16.5m a year ago. Click the image for more detail. On the flip side, it has zł2.71m in cash leading to net debt of about zł14.5m.

A Look At Patentus' Liabilities

We can see from the most recent balance sheet that Patentus had liabilities of zł15.3m falling due within a year, and liabilities of zł22.2m due beyond that. Offsetting this, it had zł2.71m in cash and zł10.2m in receivables that were due within 12 months. So its liabilities total zł24.6m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of zł27.8m, so it does suggest shareholders should keep an eye on Patentus' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Patentus will need earnings to service that debt. 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, Patentus made a loss at the EBIT level, and saw its revenue drop to zł45m, which is a fall of 72%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Patentus's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable zł7.0m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled zł3.0m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 instance, we've identified 1 warning sign for Patentus that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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