These 4 Measures Indicate That B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 (AMS:PORF) Is Using Debt Extensively

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that B.V. Delftsch Aardewerkfabriek "De Porceleyne Fles Anno 1653" (AMS:PORF) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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?

As you can see below, B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 had €16.4m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have €433.0k in cash offsetting this, leading to net debt of about €16.0m.

A Look At B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653's Liabilities

According to the last reported balance sheet, B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 had liabilities of €3.65m due within 12 months, and liabilities of €16.0m due beyond 12 months. On the other hand, it had cash of €433.0k and €2.27m worth of receivables due within a year. So its liabilities total €17.0m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of €13.2m, 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 use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 shareholders face the double whammy of a high net debt to EBITDA ratio (12.4), and fairly weak interest coverage, since EBIT is just 1.3 times the interest expense. The debt burden here is substantial. Even worse, B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 saw its EBIT tank 37% over the last 12 months. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that 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 the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 (not) growing its EBIT make us rather uncomfortable with its debt levels. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Overall, it seems to us that B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. 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 instance, we've identified 7 warning signs for B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 (2 are potentially serious) 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.