Is Palram Industries (1990) (TLV:PLRM) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Palram Industries (1990) Ltd (TLV:PLRM) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Palram Industries (1990)

How Much Debt Does Palram Industries (1990) Carry?

You can click the graphic below for the historical numbers, but it shows that Palram Industries (1990) had ₪73.6m of debt in September 2020, down from ₪165.1m, one year before. However, it does have ₪239.5m in cash offsetting this, leading to net cash of ₪165.9m.

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

According to the last reported balance sheet, Palram Industries (1990) had liabilities of ₪326.3m due within 12 months, and liabilities of ₪210.6m due beyond 12 months. Offsetting this, it had ₪239.5m in cash and ₪357.1m in receivables that were due within 12 months. So it actually has ₪59.7m 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!

Better yet, Palram Industries (1990) grew its EBIT by 602% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Palram Industries (1990) recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Palram Industries (1990) has ₪165.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in ₪314m. So is Palram Industries (1990)'s debt a risk? It doesn't seem so to us. 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 1 warning sign for Palram Industries (1990) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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