Is paragon GmbH KGaA (ETR:PGN) A Risky Investment?

Simply Wall St
March 15, 2022
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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 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. As with many other companies paragon GmbH & Co. KGaA (ETR:PGN) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for paragon GmbH KGaA

What Is paragon GmbH KGaA's Net Debt?

You can click the graphic below for the historical numbers, but it shows that paragon GmbH KGaA had €106.2m of debt in September 2021, down from €120.8m, one year before. And it doesn't have much cash, so its net debt is about the same.

XTRA:PGN Debt to Equity History March 15th 2022

How Healthy Is paragon GmbH KGaA's Balance Sheet?

According to the last reported balance sheet, paragon GmbH KGaA had liabilities of €139.6m due within 12 months, and liabilities of €48.0m due beyond 12 months. Offsetting this, it had €1.96m in cash and €10.2m in receivables that were due within 12 months. So its liabilities total €175.4m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €26.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, paragon GmbH KGaA would probably need a major re-capitalization if its creditors were to demand repayment. 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 paragon GmbH KGaA 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, paragon GmbH KGaA made a loss at the EBIT level, and saw its revenue drop to €181m, which is a fall of 7.1%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months paragon GmbH KGaA produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable €30m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost €20m in the last year. So we think buying this stock is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with paragon GmbH KGaA (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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