Is PostNL (AMS:PNL) Using Debt Sensibly?

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. As with many other companies PostNL N.V. (AMS:PNL) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for PostNL

What Is PostNL's Debt?

As you can see below, PostNL had €719.0m of debt, at July 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had €459.0m in cash, and so its net debt is €260.0m.

How Healthy Is PostNL's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PostNL had liabilities of €880.0m due within 12 months and liabilities of €1.07b due beyond that. Offsetting this, it had €459.0m in cash and €382.0m in receivables that were due within 12 months. So it has liabilities totalling €1.11b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of €1.06b, we think shareholders really should watch PostNL'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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine PostNL'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.

In the last year PostNL had a loss before interest and tax, and actually shrunk its revenue by 2.2%, to €3.1b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months PostNL produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable €1.3b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of €985m. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for PostNL (1 is potentially serious!) that you should be aware of before investing here.

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.