Does Compagnie Plastic Omnium (EPA:POM) Have A Healthy Balance Sheet?

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. Importantly, Compagnie Plastic Omnium SA (EPA:POM) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Compagnie Plastic Omnium

How Much Debt Does Compagnie Plastic Omnium Carry?

You can click the graphic below for the historical numbers, but it shows that Compagnie Plastic Omnium had €1.39b of debt in June 2021, down from €1.91b, one year before. However, it does have €635.8m in cash offsetting this, leading to net debt of about €753.3m.

A Look At Compagnie Plastic Omnium's Liabilities

According to the last reported balance sheet, Compagnie Plastic Omnium had liabilities of €2.71b due within 12 months, and liabilities of €1.51b due beyond 12 months. Offsetting this, it had €635.8m in cash and €1.11b in receivables that were due within 12 months. So it has liabilities totalling €2.47b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €3.42b, so it does suggest shareholders should keep an eye on Compagnie Plastic Omnium's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With net debt to EBITDA of 2.5 Compagnie Plastic Omnium has a fairly noticeable amount of debt. But the high interest coverage of 9.4 suggests it can easily service that debt. Notably, Compagnie Plastic Omnium's EBIT launched higher than Elon Musk, gaining a whopping 427% on last year. 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 Compagnie Plastic Omnium can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Compagnie Plastic Omnium recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

When it comes to the balance sheet, the standout positive for Compagnie Plastic Omnium was the fact that it seems able to grow its EBIT confidently. However, our other observations weren't so heartening. For instance it seems like it has to struggle a bit to handle its total liabilities. When we consider all the elements mentioned above, it seems to us that Compagnie Plastic Omnium is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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 2 warning signs for Compagnie Plastic Omnium you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.