Palram Industries (1990) (TLV:PLRM) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Palram Industries (1990) Ltd (TLV:PLRM) does use debt in its business. But should shareholders be worried about its use of debt?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Palram Industries (1990)

What Is Palram Industries (1990)'s Debt?

You can click the graphic below for the historical numbers, but it shows that Palram Industries (1990) had ₪56.8m of debt in March 2021, down from ₪168.8m, one year before. But it also has ₪342.6m in cash to offset that, meaning it has ₪285.7m net cash.

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

The latest balance sheet data shows that Palram Industries (1990) had liabilities of ₪428.6m due within a year, and liabilities of ₪204.1m falling due after that. Offsetting this, it had ₪342.6m in cash and ₪382.2m in receivables that were due within 12 months. So it can boast ₪92.1m more liquid assets than total liabilities.

This surplus suggests that Palram Industries (1990) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Palram Industries (1990) has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Palram Industries (1990) grew its EBIT by 209% 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 you can't view debt in total isolation; since Palram Industries (1990) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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) generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Palram Industries (1990) has ₪285.7m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in ₪346m. So we don't think Palram Industries (1990)'s use of debt is risky. 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.

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.
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