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

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.' 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 Palram Industries (1990) Ltd (TLV:PLRM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Palram Industries (1990)

How Much Debt Does Palram Industries (1990) Carry?

The image below, which you can click on for greater detail, shows that Palram Industries (1990) had debt of ₪73.6m at the end of September 2020, a reduction from ₪165.1m over a year. But it also has ₪239.5m in cash to offset that, meaning it has ₪165.9m net cash.

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

We can see from the most recent balance sheet that Palram Industries (1990) had liabilities of ₪326.3m falling due within a year, and liabilities of ₪210.6m due beyond that. On the other hand, it had cash of ₪239.5m and ₪357.1m worth of receivables due within a year. So it can boast ₪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. If maintained that growth will make the debt even more manageable in the years ahead. 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. 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 we empathize with investors who find debt concerning, you should keep in mind that Palram Industries (1990) has net cash of ₪165.9m, as well as more liquid assets than liabilities. 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. 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. Be aware that Palram Industries (1990) is showing 1 warning sign in our investment analysis , you should know about...

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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