The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Plastika Kritis S.A. (ATH:PLAKR) does use debt in its business. But is this debt a concern to shareholders?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Plastika Kritis's Net Debt?
As you can see below, Plastika Kritis had €11.7m of debt at December 2020, down from €14.9m a year prior. But on the other hand it also has €92.4m in cash, leading to a €80.8m net cash position.
A Look At Plastika Kritis' Liabilities
According to the last reported balance sheet, Plastika Kritis had liabilities of €36.1m due within 12 months, and liabilities of €17.0m due beyond 12 months. Offsetting this, it had €92.4m in cash and €67.2m in receivables that were due within 12 months. So it can boast €106.4m more liquid assets than total liabilities.
It's good to see that Plastika Kritis has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Plastika Kritis has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, Plastika Kritis grew its EBIT by 30% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Plastika Kritis will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Plastika Kritis may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Plastika Kritis produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to investigate a company's debt, in this case Plastika Kritis has €80.8m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 30% over the last year. So we don't think Plastika Kritis's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Plastika Kritis you should know about.
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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