These 4 Measures Indicate That PUMA (ETR:PUM) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that PUMA SE (ETR:PUM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

Check out our latest analysis for PUMA

What Is PUMA's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 PUMA had €266.4m of debt, an increase on €173.5m, over one year. But it also has €685.2m in cash to offset that, meaning it has €418.8m net cash.

A Look At PUMA's Liabilities

The latest balance sheet data shows that PUMA had liabilities of €1.87b due within a year, and liabilities of €1.05b falling due after that. On the other hand, it had cash of €685.2m and €716.0m worth of receivables due within a year. So it has liabilities totalling €1.52b more than its cash and near-term receivables, combined.

Given PUMA has a humongous market capitalization of €13.7b, 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. Despite its noteworthy liabilities, PUMA boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that PUMA's EBIT was down 52% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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. PUMA may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, PUMA recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While PUMA does have more liabilities than liquid assets, it also has net cash of €418.8m. And it impressed us with free cash flow of €271m, being 76% of its EBIT. So we are not troubled with PUMA's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with PUMA .

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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