Does PNE (ETR:PNE3) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies PNE AG (ETR:PNE3) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for PNE

How Much Debt Does PNE Carry?

As you can see below, at the end of June 2024, PNE had €762.0m of debt, up from €509.7m a year ago. Click the image for more detail. However, because it has a cash reserve of €129.8m, its net debt is less, at about €632.2m.

How Healthy Is PNE's Balance Sheet?

We can see from the most recent balance sheet that PNE had liabilities of €185.7m falling due within a year, and liabilities of €865.6m due beyond that. Offsetting this, it had €129.8m in cash and €89.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €832.1m.

This is a mountain of leverage relative to its market capitalization of €893.2m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine PNE'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.

Over 12 months, PNE made a loss at the EBIT level, and saw its revenue drop to €125m, which is a fall of 4.6%. We would much prefer see growth.

Caveat Emptor

Importantly, PNE had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €5.0m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €252m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for PNE that you should be aware of before investing here.

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.