David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Proodeftiki S.A. (ATH:PRD) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Proodeftiki
How Much Debt Does Proodeftiki Carry?
The image below, which you can click on for greater detail, shows that Proodeftiki had debt of €3.79m at the end of December 2023, a reduction from €4.26m over a year. However, because it has a cash reserve of €112.7k, its net debt is less, at about €3.68m.
How Healthy Is Proodeftiki's Balance Sheet?
The latest balance sheet data shows that Proodeftiki had liabilities of €4.94m due within a year, and liabilities of €3.99m falling due after that. Offsetting these obligations, it had cash of €112.7k as well as receivables valued at €6.92m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.90m.
This deficit isn't so bad because Proodeftiki is worth €5.93m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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
Importantly, Proodeftiki had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €485k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €462k of cash over the last year. So suffice it to say we consider the stock very risky. 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 instance, we've identified 3 warning signs for Proodeftiki that you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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@simplywallst.com
About ATSE:PRD
Proodeftiki
Operates as a civil engineering and general construction company.
Excellent balance sheet low.
