Pelatro (LON: PTRO) makes moderate use of debt

Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We note that Pelatro Plc (LON: PTRO) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

What risk does debt entail?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

Check out our latest analysis for Pelatro

What is Pelatro’s debt?

As you can see below, at the end of June 2021, Pelatro was in debt of $ 1.54 million, up from $ 1.29 million a year ago. Click on the image for more details. However, he also had $ 784.0,000 in cash, so his net debt is $ 751.0,000.

How strong is Pelatro’s balance sheet?

We can see from the most recent balance sheet that Pelatro had liabilities of US $ 1.49 million due within one year and liabilities of US $ 1.44 million due beyond. In compensation for these obligations, he had cash of US $ 784.0 K as well as receivables valued at US $ 4.45 M due within 12 months. He can therefore avail himself of $ 2.31 million in liquid assets more than total Liabilities.

This short-term liquidity is a sign that Pelatro could probably repay its debt easily, as its balance sheet is far from tight. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Pelatro can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Over 12 months Pelatro recorded a loss in EBIT and saw sales fall to US $ 5.2 million, a decrease of 17%. This is not what we hope to see.

Emptor Warning

Not only has Pelatro’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to US $ 1.2 million. On a more positive note, the company has liquid assets, so it has a bit of time to improve its operations before debt becomes a serious problem. But we would like to see positive free cash flow before we spend a lot of time trying to figure out the headline. So it seems too risky for our taste. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 2 warning signs with Pelatro and understanding them should be part of your investment process.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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