PostNL (AMS:PNL) Seems To Use Debt Quite Sensibly

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. We note that PostNL N.V. (AMS:PNL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for PostNL

How Much Debt Does PostNL Carry?

As you can see below, PostNL had €714.0m of debt, at April 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has €843.0m in cash, leading to a €129.0m net cash position.

A Look At PostNL's Liabilities

Zooming in on the latest balance sheet data, we can see that PostNL had liabilities of €918.0m due within 12 months and liabilities of €1.07b due beyond that. Offsetting these obligations, it had cash of €843.0m as well as receivables valued at €413.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €728.0m.

While this might seem like a lot, it is not so bad since PostNL has a market capitalization of €2.32b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, PostNL also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that PostNL grew its EBIT by 171% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While PostNL has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, PostNL's free cash flow amounted to 44% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While PostNL does have more liabilities than liquid assets, it also has net cash of €129.0m. And we liked the look of last year's 171% year-on-year EBIT growth. So we are not troubled with PostNL's debt use. 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. We've identified 5 warning signs with PostNL (at least 2 which are a bit unpleasant) , 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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