Preformed Line Products (NASDAQ:PLPC) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Preformed Line Products Company (NASDAQ:PLPC) does use debt in its business. But is this debt a concern to shareholders?

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. 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 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 Preformed Line Products

What Is Preformed Line Products's Net Debt?

As you can see below, Preformed Line Products had US$35.2m of debt at September 2024, down from US$62.8m a year prior. However, it does have US$47.5m in cash offsetting this, leading to net cash of US$12.3m.

A Look At Preformed Line Products' Liabilities

We can see from the most recent balance sheet that Preformed Line Products had liabilities of US$114.0m falling due within a year, and liabilities of US$49.0m due beyond that. On the other hand, it had cash of US$47.5m and US$110.9m worth of receivables due within a year. So it has liabilities totalling US$4.58m more than its cash and near-term receivables, combined.

This state of affairs indicates that Preformed Line Products' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$642.2m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Preformed Line Products boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Preformed Line Products's load is not too heavy, because its EBIT was down 61% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Preformed Line Products 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Preformed Line Products 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. Looking at the most recent three years, Preformed Line Products recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Preformed Line Products's liabilities, but we can be reassured by the fact it has has net cash of US$12.3m. So we are not troubled with Preformed Line Products's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Preformed Line Products you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.