Here's Why Polytec Holding (VIE:PYT) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Polytec Holding AG (VIE:PYT) does carry debt. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Polytec Holding

How Much Debt Does Polytec Holding Carry?

The image below, which you can click on for greater detail, shows that Polytec Holding had debt of €187.6m at the end of March 2021, a reduction from €213.6m over a year. However, because it has a cash reserve of €77.9m, its net debt is less, at about €109.7m.

How Strong Is Polytec Holding's Balance Sheet?

According to the last reported balance sheet, Polytec Holding had liabilities of €173.9m due within 12 months, and liabilities of €156.2m due beyond 12 months. On the other hand, it had cash of €77.9m and €171.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €80.5m.

While this might seem like a lot, it is not so bad since Polytec Holding has a market capitalization of €272.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Polytec Holding'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.

In the last year Polytec Holding had a loss before interest and tax, and actually shrunk its revenue by 15%, to €522m. We would much prefer see growth.

Caveat Emptor

While Polytec Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €1.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of €18m and a profit of €9.9m. So one might argue that there's still a chance it can get things on the right track. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Polytec Holding (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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