Is PARKEN Sport & Entertainment (CPH:PARKEN) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, PARKEN Sport & Entertainment A/S (CPH:PARKEN) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for PARKEN Sport & Entertainment

How Much Debt Does PARKEN Sport & Entertainment Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 PARKEN Sport & Entertainment had kr.1.46b of debt, an increase on kr.1.24b, over one year. However, it also had kr.90.0m in cash, and so its net debt is kr.1.37b.

A Look At PARKEN Sport & Entertainment's Liabilities

According to the last reported balance sheet, PARKEN Sport & Entertainment had liabilities of kr.676.0m due within 12 months, and liabilities of kr.1.39b due beyond 12 months. Offsetting these obligations, it had cash of kr.90.0m as well as receivables valued at kr.176.4m due within 12 months. So its liabilities total kr.1.80b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the kr.689.7m 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 definitely think shareholders need to watch this one closely. At the end of the day, PARKEN Sport & Entertainment would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since PARKEN Sport & Entertainment will need earnings to service that debt. 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 25%, to kr.607m. To be frank that doesn't bode well.

Caveat Emptor

While PARKEN Sport & Entertainment's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping kr.158m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. 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.192m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for PARKEN Sport & Entertainment that you should be aware of.

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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