Stock Analysis

Health Check: How Prudently Does Pittler Maschinenfabrik (FRA:PIT) Use Debt?

DB:PIT
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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 Pittler Maschinenfabrik AG (FRA:PIT) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Pittler Maschinenfabrik

What Is Pittler Maschinenfabrik's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Pittler Maschinenfabrik had €6.55m of debt, an increase on €2.81m, over one year. However, it also had €2.10m in cash, and so its net debt is €4.44m.

debt-equity-history-analysis
DB:PIT Debt to Equity History June 18th 2024

A Look At Pittler Maschinenfabrik's Liabilities

We can see from the most recent balance sheet that Pittler Maschinenfabrik had liabilities of €3.57m falling due within a year, and liabilities of €7.71m due beyond that. Offsetting these obligations, it had cash of €2.10m as well as receivables valued at €1.24m due within 12 months. So its liabilities total €7.94m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €5.00m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Pittler Maschinenfabrik would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Pittler Maschinenfabrik's earnings that will influence how the balance sheet holds up in the future. 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, Pittler Maschinenfabrik reported revenue of €7.5m, which is a gain of 33%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Pittler Maschinenfabrik managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable €662k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through €637k in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Pittler Maschinenfabrik has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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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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.

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