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. We can see that Proodeftiki S.A. (ATH:PRD) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Proodeftiki
What Is Proodeftiki's Debt?
The image below, which you can click on for greater detail, shows that Proodeftiki had debt of €9.41m at the end of June 2021, a reduction from €11.4m over a year. On the flip side, it has €4.10m in cash leading to net debt of about €5.30m.
How Strong Is Proodeftiki's Balance Sheet?
According to the last reported balance sheet, Proodeftiki had liabilities of €10.3m due within 12 months, and liabilities of €4.23m due beyond 12 months. Offsetting these obligations, it had cash of €4.10m as well as receivables valued at €6.77m due within 12 months. So its liabilities total €3.62m more than the combination of its cash and short-term receivables.
Proodeftiki has a market capitalization of €9.73m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Proodeftiki'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.
It seems likely shareholders hope that Proodeftiki can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
Caveat Emptor
Over the last twelve months Proodeftiki produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €972k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of €235k. In the meantime, we consider the stock very risky. 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 Proodeftiki (3 shouldn't be ignored!) that you should be aware of before investing here.
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.
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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.
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About ATSE:PRD
Proodeftiki
Operates as a civil engineering and general construction company.
Excellent balance sheet low.
