Prosegur Compañía de Seguridad (BME:PSG) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Prosegur Compañía de Seguridad, S.A. (BME:PSG) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Prosegur Compañía de Seguridad

What Is Prosegur Compañía de Seguridad's Debt?

You can click the graphic below for the historical numbers, but it shows that Prosegur Compañía de Seguridad had €1.67b of debt in June 2021, down from €2.23b, one year before. However, because it has a cash reserve of €582.4m, its net debt is less, at about €1.09b.

A Look At Prosegur Compañía de Seguridad's Liabilities

We can see from the most recent balance sheet that Prosegur Compañía de Seguridad had liabilities of €1.13b falling due within a year, and liabilities of €1.81b due beyond that. Offsetting these obligations, it had cash of €582.4m as well as receivables valued at €809.2m due within 12 months. So it has liabilities totalling €1.55b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of €1.31b, we think shareholders really should watch Prosegur Compañía de Seguridad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Prosegur Compañía de Seguridad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Prosegur Compañía de Seguridad made a loss at the EBIT level, and saw its revenue drop to €3.4b, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

Not only did Prosegur Compañía de Seguridad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €302m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of €161m and the profit of €42m. So one might argue that there's still a chance it can get things on the right track. 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, we've discovered 4 warning signs for Prosegur Compañía de Seguridad (1 is a bit unpleasant!) that you should be aware of before investing here.

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.

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.

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