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. 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. As with many other companies Perseus Mining Limited (ASX:PRU) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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.
What Is Perseus Mining's Debt?
The image below, which you can click on for greater detail, shows that Perseus Mining had debt of AU$44.8m at the end of June 2019, a reduction from AU$85.0m over a year. But it also has AU$125.4m in cash to offset that, meaning it has AU$80.6m net cash.
How Strong Is Perseus Mining's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Perseus Mining had liabilities of AU$85.8m due within 12 months and liabilities of AU$99.9m due beyond that. Offsetting this, it had AU$125.4m in cash and AU$8.67m in receivables that were due within 12 months. So its liabilities total AU$51.7m more than the combination of its cash and short-term receivables.
Given Perseus Mining has a market capitalization of AU$1.13b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Perseus Mining also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Perseus Mining can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Perseus Mining reported revenue of AU$509m, which is a gain of 35%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Perseus Mining?
Although Perseus Mining had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of AU$7.0m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. One positive is that Perseus Mining is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Perseus Mining insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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