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.' 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. 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 assists a business until the business has trouble paying it off, either with new capital or with free 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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is PORR's Net Debt?
The image below, which you can click on for greater detail, shows that PORR had debt of €428.4m at the end of June 2021, a reduction from €574.8m over a year. But on the other hand it also has €593.6m in cash, leading to a €165.3m net cash position.
A Look At PORR's Liabilities
We can see from the most recent balance sheet that PORR had liabilities of €2.18b falling due within a year, and liabilities of €787.6m due beyond that. On the other hand, it had cash of €593.6m and €1.61b worth of receivables due within a year. So its liabilities total €760.9m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the €502.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, PORR would likely require a major re-capitalisation if it had to pay its creditors today. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, PORR reported revenue of €4.9b, which is a gain of 2.1%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
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 €108m. 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. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for PORR you should know about.
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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