These 4 Measures Indicate That PLC (BIT:PLC) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies PLC S.p.A. (BIT:PLC) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for PLC

What Is PLC's Debt?

As you can see below, at the end of December 2020, PLC had €8.22m of debt, up from €5.93m a year ago. Click the image for more detail. However, it does have €10.4m in cash offsetting this, leading to net cash of €2.14m.

How Healthy Is PLC's Balance Sheet?

The latest balance sheet data shows that PLC had liabilities of €33.5m due within a year, and liabilities of €12.9m falling due after that. Offsetting these obligations, it had cash of €10.4m as well as receivables valued at €29.9m due within 12 months. So it has liabilities totalling €6.12m more than its cash and near-term receivables, combined.

Since publicly traded PLC shares are worth a total of €45.3m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, PLC boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that PLC improved its EBIT from a last year's loss to a positive €683k. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine PLC's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. PLC 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 year, PLC saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

Although PLC's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €2.14m. So although we see some areas for improvement, we're not too worried about PLC's balance sheet. 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 2 warning signs for PLC that you should be aware of before investing here.

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.

If you’re looking to trade PLC, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.