We Think Plastika Kritis (ATH:PLAKR) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Plastika Kritis

What Is Plastika Kritis's Debt?

You can click the graphic below for the historical numbers, but it shows that Plastika Kritis had €12.3m of debt in June 2020, down from €15.2m, one year before. However, its balance sheet shows it holds €84.2m in cash, so it actually has €71.8m net cash.

A Look At Plastika Kritis's Liabilities

According to the last reported balance sheet, Plastika Kritis had liabilities of €52.1m due within 12 months, and liabilities of €16.8m due beyond 12 months. Offsetting this, it had €84.2m in cash and €69.9m in receivables that were due within 12 months. So it actually has €85.1m more liquid assets than total liabilities.

This excess liquidity suggests that Plastika Kritis is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Plastika Kritis boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Plastika Kritis grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, Plastika Kritis recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Plastika Kritis has net cash of €71.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 24% over the last year. So we don't think Plastika Kritis's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Plastika Kritis is showing 1 warning sign in our investment analysis , you should know about...

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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