Here's Why Plan Optik (ETR:P4O) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Plan Optik AG (ETR:P4O) does carry debt. But the real question is whether this debt is making the company risky.

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Plan Optik

What Is Plan Optik's Debt?

You can click the graphic below for the historical numbers, but it shows that Plan Optik had €3.79m of debt in June 2022, down from €4.37m, one year before. However, it does have €3.88m in cash offsetting this, leading to net cash of €87.6k.

A Look At Plan Optik's Liabilities

Zooming in on the latest balance sheet data, we can see that Plan Optik had liabilities of €3.07m due within 12 months and liabilities of €2.99m due beyond that. On the other hand, it had cash of €3.88m and €351.7k worth of receivables due within a year. So its liabilities total €1.82m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Plan Optik has a market capitalization of €8.96m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Plan Optik also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Plan Optik grew its EBIT by 538% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Plan Optik's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Plan Optik 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, Plan Optik reported free cash flow worth 3.1% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

Although Plan Optik's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €87.6k. And it impressed us with its EBIT growth of 538% over the last year. So we are not troubled with Plan Optik's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Plan Optik has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.