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Warren Buffett famously said, '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 should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Perseus Mining's Net Debt?
As you can see below, Perseus Mining had AU$68.8m of debt at December 2021, down from AU$168.9m a year prior. However, its balance sheet shows it holds AU$268.2m in cash, so it actually has AU$199.4m net cash.
How Healthy Is Perseus Mining's Balance Sheet?
We can see from the most recent balance sheet that Perseus Mining had liabilities of AU$140.7m falling due within a year, and liabilities of AU$174.8m due beyond that. Offsetting this, it had AU$268.2m in cash and AU$22.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$25.0m.
Having regard to Perseus Mining's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$2.20b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.
On top of that, Perseus Mining grew its EBIT by 61% over the last twelve months, and that growth will make it easier to handle its debt. 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 Perseus Mining's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Perseus Mining may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Perseus Mining recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Perseus Mining has AU$199.4m in net cash. And it impressed us with its EBIT growth of 61% over the last year. So we don't think Perseus Mining's use of debt is risky. 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. For example - Perseus Mining has 1 warning sign we think you should be aware of.
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.
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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.