Is PUMA (ETR:PUM) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 PUMA SE (ETR:PUM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for PUMA

What Is PUMA's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 PUMA had debt of €423.6m, up from €314.8m in one year. But on the other hand it also has €749.4m in cash, leading to a €325.8m net cash position.

A Look At PUMA's Liabilities

According to the last reported balance sheet, PUMA had liabilities of €2.11b due within 12 months, and liabilities of €1.34b due beyond 12 months. Offsetting these obligations, it had cash of €749.4m as well as receivables valued at €1.06b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.64b.

Given PUMA has a humongous market capitalization of €14.2b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, PUMA also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that PUMA grew its EBIT by 183% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine PUMA's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While PUMA has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, PUMA generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While PUMA does have more liabilities than liquid assets, it also has net cash of €325.8m. And it impressed us with free cash flow of €500m, being 84% of its EBIT. So is PUMA's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in PUMA, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.