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 real question is whether this debt is making the company risky.
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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Palram Industries (1990)
How Much Debt Does Palram Industries (1990) Carry?
As you can see below, Palram Industries (1990) had ₪26.8m of debt at June 2023, down from ₪72.6m a year prior. However, its balance sheet shows it holds ₪250.1m in cash, so it actually has ₪223.3m net cash.
How Strong Is Palram Industries (1990)'s Balance Sheet?
The latest balance sheet data shows that Palram Industries (1990) had liabilities of ₪323.4m due within a year, and liabilities of ₪171.9m falling due after that. Offsetting this, it had ₪250.1m in cash and ₪395.1m in receivables that were due within 12 months. So it actually has ₪149.9m more liquid assets than total liabilities.
This excess liquidity suggests that Palram Industries (1990) is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Palram Industries (1990) boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Palram Industries (1990) if management cannot prevent a repeat of the 51% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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) produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Palram Industries (1990) has net cash of ₪223.3m, as well as more liquid assets than liabilities. So we don't have any problem with Palram Industries (1990)'s use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Palram Industries (1990) that you should be aware of.
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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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.
About TASE:PLRM
Palram Industries (1990)
Manufactures and sells thermoplastic sheets, and panel systems, and finished products in Israel and internationally.
Flawless balance sheet with solid track record and pays a dividend.