Is Palram Industries (1990) (TLV:PLRM) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Palram Industries (1990) Ltd (TLV:PLRM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Palram Industries (1990)

How Much Debt Does Palram Industries (1990) Carry?

As you can see below, Palram Industries (1990) had ₪48.5m of debt at September 2021, down from ₪73.6m a year prior. But it also has ₪340.5m in cash to offset that, meaning it has ₪292.0m net cash.

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

According to the last reported balance sheet, Palram Industries (1990) had liabilities of ₪367.8m due within 12 months, and liabilities of ₪245.5m due beyond 12 months. On the other hand, it had cash of ₪340.5m and ₪329.6m worth of receivables due within a year. So it actually has ₪56.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Palram Industries (1990) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Palram Industries (1990) boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Palram Industries (1990) has increased its EBIT by 9.1% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Palram Industries (1990) 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 company can only pay off debt with cold hard cash, not accounting profits. While Palram Industries (1990) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Palram Industries (1990) generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Palram Industries (1990) has net cash of ₪292.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in ₪212m. So we don't think Palram Industries (1990)'s use of debt is risky. 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. For instance, we've identified 1 warning sign for Palram Industries (1990) that you should be aware of.

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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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.