Thrace Plastics Holding and Commercial (ATH:PLAT) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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. Importantly, Thrace Plastics Holding and Commercial S.A. (ATH:PLAT) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Thrace Plastics Holding and Commercial

What Is Thrace Plastics Holding and Commercial's Debt?

You can click the graphic below for the historical numbers, but it shows that Thrace Plastics Holding and Commercial had €69.2m of debt in September 2020, down from €88.7m, one year before. On the flip side, it has €35.3m in cash leading to net debt of about €33.9m.

A Look At Thrace Plastics Holding and Commercial's Liabilities

Zooming in on the latest balance sheet data, we can see that Thrace Plastics Holding and Commercial had liabilities of €114.4m due within 12 months and liabilities of €69.0m due beyond that. Offsetting this, it had €35.3m in cash and €72.8m in receivables that were due within 12 months. So it has liabilities totalling €75.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Thrace Plastics Holding and Commercial has a market capitalization of €182.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Thrace Plastics Holding and Commercial has a low net debt to EBITDA ratio of only 0.63. And its EBIT covers its interest expense a whopping 12.2 times over. So we're pretty relaxed about its super-conservative use of debt. Better yet, Thrace Plastics Holding and Commercial grew its EBIT by 216% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Thrace Plastics Holding and Commercial can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, Thrace Plastics Holding and Commercial created free cash flow amounting to 19% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

Happily, Thrace Plastics Holding and Commercial's impressive interest cover implies it has the upper hand on its debt. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. All these things considered, it appears that Thrace Plastics Holding and Commercial can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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. Be aware that Thrace Plastics Holding and Commercial is showing 2 warning signs 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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