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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Paladin Limited (HKG:495) does carry debt. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Paladin
What Is Paladin's Net Debt?
The image below, which you can click on for greater detail, shows that Paladin had debt of HK$169.7m at the end of December 2018, a reduction from HK$183.6m over a year. However, its balance sheet shows it holds HK$297.3m in cash, so it actually has HK$127.6m net cash.
A Look At Paladin's Liabilities
We can see from the most recent balance sheet that Paladin had liabilities of HK$172.8m falling due within a year, and liabilities of HK$8.66m due beyond that. On the other hand, it had cash of HK$297.3m and HK$5.04m worth of receivables due within a year. So it can boast HK$120.9m more liquid assets than total liabilities.
This luscious liquidity implies that Paladin's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Paladin boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Paladin will need earnings to service that debt. 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.
In the last year Paladin managed to grow its revenue by 25%, to HK$6.8m. With any luck the company will be able to grow its way to profitability.