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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies PARKEN Sport & Entertainment A/S (CPH:PARKEN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for PARKEN Sport & Entertainment

What Is PARKEN Sport & Entertainment's Debt?

As you can see below, PARKEN Sport & Entertainment had kr.1.40b of debt at June 2022, down from kr.1.55b a year prior. However, it does have kr.29.5m in cash offsetting this, leading to net debt of about kr.1.37b.

A Look At PARKEN Sport & Entertainment's Liabilities

Zooming in on the latest balance sheet data, we can see that PARKEN Sport & Entertainment had liabilities of kr.838.4m due within 12 months and liabilities of kr.1.34b due beyond that. Offsetting this, it had kr.29.5m in cash and kr.228.4m in receivables that were due within 12 months. So it has liabilities totalling kr.1.92b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the kr.730.8m company, like a colossus towering over mere mortals. 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.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

PARKEN Sport & Entertainment has a debt to EBITDA ratio of 3.8 and its EBIT covered its interest expense 5.2 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. We also note that PARKEN Sport & Entertainment improved its EBIT from a last year's loss to a positive kr.239m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is PARKEN Sport & Entertainment'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the most recent year, PARKEN Sport & Entertainment recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Mulling over PARKEN Sport & Entertainment's attempt at staying on top of its total liabilities, we're certainly not enthusiastic. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Overall, we think it's fair to say that PARKEN Sport & Entertainment has enough debt that there are some real risks around the balance sheet. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. 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. Case in point: We've spotted 4 warning signs for PARKEN Sport & Entertainment you should be aware of, and 1 of them shouldn't be ignored.

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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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.