Is PARKEN Sport & Entertainment (CPH:PARKEN) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that PARKEN Sport & Entertainment A/S (CPH:PARKEN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 PARKEN Sport & Entertainment

What Is PARKEN Sport & Entertainment's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 PARKEN Sport & Entertainment had kr.1.72b of debt, an increase on kr.1.18b, over one year. However, it does have kr.195.3m in cash offsetting this, leading to net debt of about kr.1.53b.

How Strong Is PARKEN Sport & Entertainment's Balance Sheet?

The latest balance sheet data shows that PARKEN Sport & Entertainment had liabilities of kr.598.1m due within a year, and liabilities of kr.1.86b falling due after that. Offsetting these obligations, it had cash of kr.195.3m as well as receivables valued at kr.188.8m due within 12 months. So it has liabilities totalling kr.2.07b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the kr.781.6m 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, PARKEN Sport & Entertainment would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is PARKEN Sport & Entertainment'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.

In the last year PARKEN Sport & Entertainment had a loss before interest and tax, and actually shrunk its revenue by 36%, to kr.534m. To be frank that doesn't bode well.

Caveat Emptor

Not only did PARKEN Sport & Entertainment's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable kr.291m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through kr.256m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - PARKEN Sport & Entertainment has 2 warning signs we think you should be aware of.

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. 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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