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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Locality Planning Energy Holdings Limited (ASX:LPE) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Locality Planning Energy Holdings
What Is Locality Planning Energy Holdings's Debt?
As you can see below, at the end of June 2019, Locality Planning Energy Holdings had AU$5.22m of debt, up from AU$1.35m a year ago. Click the image for more detail. However, because it has a cash reserve of AU$3.31m, its net debt is less, at about AU$1.91m.
How Strong Is Locality Planning Energy Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Locality Planning Energy Holdings had liabilities of AU$3.60m due within 12 months and liabilities of AU$5.23m due beyond that. Offsetting this, it had AU$3.31m in cash and AU$4.62m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$897.5k.
Since publicly traded Locality Planning Energy Holdings shares are worth a total of AU$36.2m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Locality Planning Energy Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.