Pilulka Lékárny (SEP:PINK) Is Making Moderate Use Of 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.' 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. We note that Pilulka Lékárny a.s. (SEP:PINK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Pilulka Lékárny

How Much Debt Does Pilulka Lékárny Carry?

The image below, which you can click on for greater detail, shows that Pilulka Lékárny had debt of Kč77.0m at the end of December 2023, a reduction from Kč84.8m over a year. However, because it has a cash reserve of Kč10.8m, its net debt is less, at about Kč66.2m.

How Healthy Is Pilulka Lékárny's Balance Sheet?

According to the last reported balance sheet, Pilulka Lékárny had liabilities of Kč396.2m due within 12 months, and liabilities of Kč12.8m due beyond 12 months. Offsetting this, it had Kč10.8m in cash and Kč168.7m in receivables that were due within 12 months. So its liabilities total Kč229.4m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of Kč341.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Pilulka Lékárny 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.

In the last year Pilulka Lékárny had a loss before interest and tax, and actually shrunk its revenue by 13%, to Kč2.1b. That's not what we would hope to see.

Caveat Emptor

While Pilulka Lékárny's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable Kč149m at the EBIT level. 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. Another cause for caution is that is bled Kč70m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Pilulka Lékárny has 5 warning signs (and 2 which are significant) we think you should know about.

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 using an unbiased methodology and our articles are not intended to be financial advice. 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.