Health Check: How Prudently Does Prismaflex International (EPA:ALPRI) Use Debt?

Simply Wall St
August 18, 2021
Source: Shutterstock

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. As with many other companies Prismaflex International, S.A. (EPA:ALPRI) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Prismaflex International

What Is Prismaflex International's Net Debt?

As you can see below, at the end of March 2021, Prismaflex International had €11.5m of debt, up from €9.28m a year ago. Click the image for more detail. However, it does have €3.29m in cash offsetting this, leading to net debt of about €8.20m.

ENXTPA:ALPRI Debt to Equity History August 19th 2021

How Strong Is Prismaflex International's Balance Sheet?

According to the last reported balance sheet, Prismaflex International had liabilities of €18.7m due within 12 months, and liabilities of €11.5m due beyond 12 months. Offsetting these obligations, it had cash of €3.29m as well as receivables valued at €12.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €14.7m.

This deficit is considerable relative to its market capitalization of €16.3m, so it does suggest shareholders should keep an eye on Prismaflex International's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Prismaflex International'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.

In the last year Prismaflex International had a loss before interest and tax, and actually shrunk its revenue by 23%, to €40m. That makes us nervous, to say the least.

Caveat Emptor

While Prismaflex International's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €1.4m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €1.4m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Prismaflex International (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

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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