U.S. Markets close in 5 hrs 43 mins
  • S&P 500

    +21.97 (+0.59%)
  • Dow 30

    +21.32 (+0.07%)
  • Nasdaq

    +128.43 (+1.18%)
  • Russell 2000

    +9.28 (+0.55%)
  • Crude Oil

    +1.18 (+1.50%)
  • Gold

    -3.00 (-0.18%)
  • Silver

    +0.06 (+0.29%)

    -0.0023 (-0.2416%)
  • 10-Yr Bond

    +0.0780 (+2.11%)
  • Vix

    +0.73 (+2.44%)

    -0.0036 (-0.3343%)

    +0.8720 (+0.6084%)

    +283.00 (+1.50%)
  • CMC Crypto 200

    +6.35 (+1.47%)
  • FTSE 100

    -8.71 (-0.12%)
  • Nikkei 225

    -722.28 (-2.66%)

Is Pental (ASX:PTL) A Risky Investment?

·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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Pental Limited (ASX:PTL) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Pental

What Is Pental's Debt?

As you can see below, at the end of June 2022, Pental had AU$3.91m of debt, up from AU$81.0k a year ago. Click the image for more detail. However, it does have AU$8.13m in cash offsetting this, leading to net cash of AU$4.22m.


How Healthy Is Pental's Balance Sheet?

The latest balance sheet data shows that Pental had liabilities of AU$25.6m due within a year, and liabilities of AU$7.85m falling due after that. Offsetting these obligations, it had cash of AU$8.13m as well as receivables valued at AU$17.4m due within 12 months. So it has liabilities totalling AU$7.94m more than its cash and near-term receivables, combined.

Of course, Pental has a market capitalization of AU$70.3m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Pental boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Pental has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Pental'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Pental has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Pental actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Pental does have more liabilities than liquid assets, it also has net cash of AU$4.22m. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in AU$7.7m. So is Pental's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 3 warning signs we've spotted with Pental .

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