Does B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 (AMS:PORF) Have A Healthy 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. Importantly, B.V. Delftsch Aardewerkfabriek "De Porceleyne Fles Anno 1653" (AMS:PORF) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653

How Much Debt Does B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 Carry?

The chart below, which you can click on for greater detail, shows that B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 had €17.0m in debt in June 2023; about the same as the year before. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653's Balance Sheet?

According to the last reported balance sheet, B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 had liabilities of €3.14m due within 12 months, and liabilities of €16.5m due beyond 12 months. Offsetting these obligations, it had cash of €210.0k as well as receivables valued at €3.94m due within 12 months. So it has liabilities totalling €15.5m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of €12.9m, we think shareholders really should watch B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With a net debt to EBITDA ratio of 11.0, it's fair to say B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 does have a significant amount of debt. However, its interest coverage of 2.7 is reasonably strong, which is a good sign. The good news is that B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 grew its EBIT a smooth 33% over the last twelve months. Like the milk of human kindness that sort of growth increases resilience, making the company more capable of managing debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653's net debt to EBITDA and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. But at least it's pretty decent at growing its EBIT; that's encouraging. We're quite clear that we consider B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

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.