PORR (VIE:POS) Has Debt But No Earnings; Should You Worry?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, PORR AG (VIE:POS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for PORR

What Is PORR's Debt?

As you can see below, PORR had €433.9m of debt at December 2020, down from €589.7m a year prior. But it also has €695.8m in cash to offset that, meaning it has €261.9m net cash.

A Look At PORR's Liabilities

Zooming in on the latest balance sheet data, we can see that PORR had liabilities of €2.04b due within 12 months and liabilities of €819.3m due beyond that. Offsetting this, it had €695.8m in cash and €1.44b in receivables that were due within 12 months. So its liabilities total €724.9m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's €490.9m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that PORR has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. 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 PORR's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year PORR had a loss before interest and tax, and actually shrunk its revenue by 4.7%, to €4.7b. That's not what we would hope to see.

So How Risky Is PORR?

While PORR lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €35m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. 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. Case in point: We've spotted 1 warning sign for PORR you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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