PUMA (ETR:PUM) Could Easily Take On More Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies PUMA SE (ETR:PUM) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for PUMA

How Much Debt Does PUMA Carry?

As you can see below, at the end of June 2021, PUMA had €536.9m of debt, up from €158.0m a year ago. Click the image for more detail. But it also has €755.2m in cash to offset that, meaning it has €218.3m net cash.

How Healthy Is PUMA's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PUMA had liabilities of €2.18b due within 12 months and liabilities of €1.33b due beyond that. Offsetting these obligations, it had cash of €755.2m as well as receivables valued at €931.1m due within 12 months. So its liabilities total €1.82b more than the combination of its cash and short-term receivables.

Since publicly traded PUMA shares are worth a very impressive total of €16.0b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, PUMA boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, PUMA grew its EBIT by 206% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, PUMA recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

Although PUMA's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €218.3m. And it impressed us with free cash flow of €500m, being 81% 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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