Here's Why Palram Industries (1990) (TLV:PLRM) Can Manage Its Debt Responsibly

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 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. As with many other companies Palram Industries (1990) Ltd (TLV:PLRM) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that PLRM is potentially undervalued!

What Is Palram Industries (1990)'s Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Palram Industries (1990) had debt of ₪72.6m, up from ₪48.5m in one year. However, its balance sheet shows it holds ₪170.9m in cash, so it actually has ₪98.2m net cash.

How Healthy Is Palram Industries (1990)'s Balance Sheet?

According to the last reported balance sheet, Palram Industries (1990) had liabilities of ₪538.5m due within 12 months, and liabilities of ₪208.4m due beyond 12 months. Offsetting these obligations, it had cash of ₪170.9m as well as receivables valued at ₪410.3m due within 12 months. So its liabilities total ₪165.8m more than the combination of its cash and short-term receivables.

Palram Industries (1990) has a market capitalization of ₪701.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Palram Industries (1990) boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Palram Industries (1990)'s load is not too heavy, because its EBIT was down 22% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Palram Industries (1990)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Palram Industries (1990) 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, Palram Industries (1990) produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Palram Industries (1990)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₪98.2m. So we are not troubled with Palram Industries (1990)'s debt use. 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. For example, we've discovered 1 warning sign for Palram Industries (1990) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.