U.S. Markets open in 2 hrs 40 mins

Is P2P Transport (ASX:P2P) A Risky Investment?

Simply Wall St

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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies P2P Transport Limited (ASX:P2P) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for P2P Transport

What Is P2P Transport's Net Debt?

The image below, which you can click on for greater detail, shows that P2P Transport had debt of AU$3.86m at the end of June 2019, a reduction from AU$6.74m over a year. However, it does have AU$1.81m in cash offsetting this, leading to net debt of about AU$2.06m.

ASX:P2P Historical Debt, October 4th 2019

A Look At P2P Transport's Liabilities

Zooming in on the latest balance sheet data, we can see that P2P Transport had liabilities of AU$35.8m due within 12 months and liabilities of AU$10.3m due beyond that. Offsetting these obligations, it had cash of AU$1.81m as well as receivables valued at AU$8.08m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$36.2m.

The deficiency here weighs heavily on the AU$14.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt After all, P2P Transport 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 future earnings, more than anything, that will determine P2P Transport's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year P2P Transport wasn't profitable at an EBIT level, but managed to grow its revenue by94%, to AU$64m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, P2P Transport still had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable AU$7.8m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through AU$3.2m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. For riskier companies like P2P Transport I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.