These 4 Measures Indicate That AS Pro Kapital Grupp (TAL:PKG1T) Is Using Debt Extensively

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.' 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 AS Pro Kapital Grupp (TAL:PKG1T) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for AS Pro Kapital Grupp

What Is AS Pro Kapital Grupp's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 AS Pro Kapital Grupp had debt of €134.4m, up from €122.0m in one year. However, because it has a cash reserve of €9.39m, its net debt is less, at about €125.0m.

A Look At AS Pro Kapital Grupp's Liabilities

The latest balance sheet data shows that AS Pro Kapital Grupp had liabilities of €110.6m due within a year, and liabilities of €58.5m falling due after that. Offsetting this, it had €9.39m in cash and €1.80m in receivables that were due within 12 months. So it has liabilities totalling €157.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €41.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, AS Pro Kapital Grupp 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

AS Pro Kapital Grupp shareholders face the double whammy of a high net debt to EBITDA ratio (143), and fairly weak interest coverage, since EBIT is just 0.04 times the interest expense. The debt burden here is substantial. Even worse, AS Pro Kapital Grupp saw its EBIT tank 93% over the last 12 months. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. There's no doubt that we learn most about debt from the balance sheet. But it is AS Pro Kapital Grupp'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 the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, AS Pro Kapital Grupp generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

To be frank both AS Pro Kapital Grupp's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Taking into account all the aforementioned factors, it looks like AS Pro Kapital Grupp has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for AS Pro Kapital Grupp you should be aware of, and 2 of them make us uncomfortable.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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