Perrot Duval Holding (VTX:PEDU) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Perrot Duval Holding S.A. (VTX:PEDU) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Perrot Duval Holding

What Is Perrot Duval Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that Perrot Duval Holding had CHF2.78m of debt in October 2020, down from CHF7.34m, one year before. But it also has CHF22.5m in cash to offset that, meaning it has CHF19.7m net cash.

How Healthy Is Perrot Duval Holding's Balance Sheet?

We can see from the most recent balance sheet that Perrot Duval Holding had liabilities of CHF4.23m falling due within a year, and liabilities of CHF2.73m due beyond that. On the other hand, it had cash of CHF22.5m and CHF815.0k worth of receivables due within a year. So it actually has CHF16.3m more liquid assets than total liabilities.

This surplus strongly suggests that Perrot Duval Holding has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Perrot Duval Holding has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Perrot Duval Holding 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.

Over 12 months, Perrot Duval Holding made a loss at the EBIT level, and saw its revenue drop to CHF13m, which is a fall of 73%. That makes us nervous, to say the least.

So How Risky Is Perrot Duval Holding?

While Perrot Duval Holding lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CHF1.1m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. There's no doubt the next few years will be crucial to how the business matures. 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. Take risks, for example - Perrot Duval Holding has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you’re looking to trade Perrot Duval Holding, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.