Portmeirion Group (LON:PMP) Has Debt But No Earnings; Should You Worry?

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.' 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 Portmeirion Group PLC (LON:PMP) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Portmeirion Group

What Is Portmeirion Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Portmeirion Group had UK£10.9m of debt in December 2020, down from UK£13.5m, one year before. However, its balance sheet shows it holds UK£11.6m in cash, so it actually has UK£667.0k net cash.

How Healthy Is Portmeirion Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Portmeirion Group had liabilities of UK£18.7m due within 12 months and liabilities of UK£15.5m due beyond that. Offsetting these obligations, it had cash of UK£11.6m as well as receivables valued at UK£15.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£6.78m.

Since publicly traded Portmeirion Group shares are worth a total of UK£81.1m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Portmeirion Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Portmeirion Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Portmeirion Group made a loss at the EBIT level, and saw its revenue drop to UK£88m, which is a fall of 5.3%. That's not what we would hope to see.

So How Risky Is Portmeirion Group?

Although Portmeirion Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£4.4m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For example - Portmeirion Group has 1 warning sign we think you should be aware of.

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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