Is PCAS (EPA:PCA) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that PCAS SA (EPA:PCA) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for PCAS

What Is PCAS's Net Debt?

As you can see below, PCAS had €58.5m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has €8.55m in cash leading to net debt of about €49.9m.

How Strong Is PCAS' Balance Sheet?

We can see from the most recent balance sheet that PCAS had liabilities of €171.8m falling due within a year, and liabilities of €69.7m due beyond that. Offsetting this, it had €8.55m in cash and €54.7m in receivables that were due within 12 months. So its liabilities total €178.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €96.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, PCAS would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since PCAS will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year PCAS had a loss before interest and tax, and actually shrunk its revenue by 4.2%, to €195m. We would much prefer see growth.

Caveat Emptor

Importantly, PCAS had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable €11m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through €32m in negative free cash flow over the last year. That means it's on the risky side of things. 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 PCAS has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.