U.S. markets close in 6 hours 29 minutes
  • S&P 500

    3,751.45
    -39.48 (-1.04%)
     
  • Dow 30

    30,034.86
    -281.46 (-0.93%)
     
  • Nasdaq

    11,033.71
    -142.69 (-1.28%)
     
  • Russell 2000

    1,775.77
    +66.90 (+3.91%)
     
  • Crude Oil

    86.99
    +0.47 (+0.54%)
     
  • Gold

    1,719.50
    -11.00 (-0.64%)
     
  • Silver

    20.30
    -0.80 (-3.81%)
     
  • EUR/USD

    0.9888
    -0.0098 (-0.98%)
     
  • 10-Yr Bond

    3.7210
    +0.1040 (+2.88%)
     
  • GBP/USD

    1.1302
    -0.0172 (-1.50%)
     
  • USD/JPY

    144.5100
    +0.3110 (+0.22%)
     
  • BTC-USD

    19,916.65
    -67.93 (-0.34%)
     
  • CMC Crypto 200

    450.66
    -7.74 (-1.69%)
     
  • FTSE 100

    7,040.29
    -46.17 (-0.65%)
     
  • Nikkei 225

    27,120.53
    +128.32 (+0.48%)
     

Is Paladin Energy (ASX:PDN) Using Too Much Debt?

·4 min read

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.' 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. We can see that Paladin Energy Ltd (ASX:PDN) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Paladin Energy

What Is Paladin Energy's Debt?

As you can see below, at the end of June 2022, Paladin Energy had US$78.6m of debt, up from US$68.7m a year ago. Click the image for more detail. However, it does have US$177.1m in cash offsetting this, leading to net cash of US$98.5m.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Paladin Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Paladin Energy had liabilities of US$2.60m due within 12 months and liabilities of US$120.0m due beyond that. Offsetting this, it had US$177.1m in cash and US$5.08m in receivables that were due within 12 months. So it can boast US$59.6m more liquid assets than total liabilities.

This surplus suggests that Paladin Energy has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Paladin Energy boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Paladin Energy'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.

Over 12 months, Paladin Energy reported revenue of US$4.7m, which is a gain of 57%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Paladin Energy?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Paladin Energy lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$8.0m and booked a US$27m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$98.5m. That means it could keep spending at its current rate for more than two years. Paladin Energy's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Paladin Energy you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here