David Iben put it well when he declared, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ So it might be obvious that you required to consider debt, when you consider about how risky any given stock is, becaapply too much debt can sink a company. We note that Perenti Limited (ASX:PRN) does have debt on its balance sheet. But the real question is whether this debt is building the company risky.
When Is Debt A Problem?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, toreceiveher.
How Much Debt Does Perenti Carry?
The image below, which you can click on for greater detail, displays that Perenti had debt of AU$745.8m at the finish of June 2025, a reduction from AU$880.9m over a year. On the flip side, it has AU$481.3m in cash leading to net debt of about AU$264.5m.
How Strong Is Perenti’s Balance Sheet?
We can see from the most recent balance sheet that Perenti had liabilities of AU$777.6m falling due within a year, and liabilities of AU$679.1m due beyond that. On the other hand, it had cash of AU$481.3m and AU$539.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$436.4m.
Of course, Perenti has a market capitalization of AU$2.54b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommfinish shareholders continue to monitor the balance sheet, going forward.
See our latest analysis for Perenti
In order to size up a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
While Perenti’s low debt to EBITDA ratio of 0.45 suggests only modest apply of debt, the fact that EBIT only covered the interest expense by 3.3 times last year does give us paapply. But the interest payments are certainly sufficient to have us considering about how affordable its debt is. Unfortunately, Perenti saw its EBIT slide 2.8% in the last twelve months. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Perenti’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals consider, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business requireds free cash flow to pay off debt; accounting profits just don’t cut it. So we clearly required to view at whether that EBIT is leading to corresponding free cash flow. During the last three years, Perenti produced sturdy free cash flow equating to 55% of its EBIT, about what we’d expect. This cold hard cash means it can reduce its debt when it wants to.
Our View
On our analysis Perenti’s net debt to EBITDA should signal that it won’t have too much trouble with its debt. However, our other observations weren’t so heartening. For example, its interest cover creates us a little nervous about its debt. Considering this range of data points, we consider Perenti is in a good position to manage its debt levels. But a word of caution: we consider debt levels are high enough to justify ongoing monitoring. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. For example – Perenti has 3 warning signs we consider you should be aware of.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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 applying an unbiased methodology and our articles are not intfinished to be financial advice. It does not constitute a recommfinishation to acquire or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focapplyd 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.
