We Think Patentus (WSE:PAT) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Patentus S.A. (WSE:PAT) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Patentus

How Much Debt Does Patentus Carry?

The image below, which you can click on for greater detail, shows that Patentus had debt of zł13.4m at the end of September 2021, a reduction from zł15.1m over a year. However, because it has a cash reserve of zł2.39m, its net debt is less, at about zł11.0m.

A Look At Patentus' Liabilities

According to the last reported balance sheet, Patentus had liabilities of zł14.5m due within 12 months, and liabilities of zł21.9m due beyond 12 months. Offsetting this, it had zł2.39m in cash and zł14.6m in receivables that were due within 12 months. So its liabilities total zł19.5m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Patentus has a market capitalization of zł34.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Patentus made a loss at the EBIT level, and saw its revenue drop to zł39m, which is a fall of 57%. To be frank that doesn't bode well.

Caveat Emptor

While Patentus'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 a very considerable zł6.3m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of zł5.7m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Patentus .

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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