Health Check: How Prudently Does Plasto-Cargal Group (TLV:PLCR) Use Debt?

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.' 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. We can see that Plasto-Cargal Group Ltd (TLV:PLCR) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Plasto-Cargal Group

How Much Debt Does Plasto-Cargal Group Carry?

As you can see below, Plasto-Cargal Group had ₪208.3m of debt at December 2023, down from ₪261.4m a year prior. However, because it has a cash reserve of ₪13.4m, its net debt is less, at about ₪194.8m.

How Strong Is Plasto-Cargal Group's Balance Sheet?

According to the last reported balance sheet, Plasto-Cargal Group had liabilities of ₪364.8m due within 12 months, and liabilities of ₪208.2m due beyond 12 months. Offsetting this, it had ₪13.4m in cash and ₪137.2m in receivables that were due within 12 months. So its liabilities total ₪422.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₪27.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Plasto-Cargal Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Plasto-Cargal Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Plasto-Cargal Group made a loss at the EBIT level, and saw its revenue drop to ₪455m, which is a fall of 35%. To be frank that doesn't bode well.

Caveat Emptor

While Plasto-Cargal Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₪1.6m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₪29m in the last year. So we think buying this stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Plasto-Cargal Group (3 shouldn't be ignored!) that you should be aware of before investing here.

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. 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.