Is Pipe Works L. Girakian Profil (ATH:PROFK) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Pipe Works L. Girakian Profil S.A. (ATH:PROFK) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Pipe Works L. Girakian Profil

What Is Pipe Works L. Girakian Profil's Debt?

As you can see below, at the end of December 2020, Pipe Works L. Girakian Profil had €12.5m of debt, up from €11.8m a year ago. Click the image for more detail. However, because it has a cash reserve of €747.5k, its net debt is less, at about €11.8m.

How Strong Is Pipe Works L. Girakian Profil's Balance Sheet?

We can see from the most recent balance sheet that Pipe Works L. Girakian Profil had liabilities of €11.1m falling due within a year, and liabilities of €11.1m due beyond that. On the other hand, it had cash of €747.5k and €9.14m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €12.3m.

This deficit casts a shadow over the €6.80m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Pipe Works L. Girakian Profil would likely require a major re-capitalisation if it had to pay its creditors today.

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.

Pipe Works L. Girakian Profil shareholders face the double whammy of a high net debt to EBITDA ratio (23.8), and fairly weak interest coverage, since EBIT is just 0.40 times the interest expense. This means we'd consider it to have a heavy debt load. One redeeming factor for Pipe Works L. Girakian Profil is that it turned last year's EBIT loss into a gain of €211k, over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Pipe Works L. Girakian Profil's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, Pipe Works L. Girakian Profil burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Pipe Works L. Girakian Profil's conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability to grow its EBIT isn't such a worry. Considering all the factors previously mentioned, we think that Pipe Works L. Girakian Profil really is carrying too much debt. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. 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. Case in point: We've spotted 4 warning signs for Pipe Works L. Girakian Profil you should be aware of, and 3 of them are a bit concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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