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, Plastika Kritis S.A. (ATH:PLAKR) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Plastika Kritis
What Is Plastika Kritis's Debt?
The image below, which you can click on for greater detail, shows that Plastika Kritis had debt of €15.2m at the end of June 2019, a reduction from €15.9m over a year. However, it does have €57.2m in cash offsetting this, leading to net cash of €42.1m.
How Strong Is Plastika Kritis's Balance Sheet?
We can see from the most recent balance sheet that Plastika Kritis had liabilities of €43.9m falling due within a year, and liabilities of €16.2m due beyond that. On the other hand, it had cash of €57.2m and €70.1m worth of receivables due within a year. So it actually has €67.2m more liquid assets than total liabilities.
This surplus suggests that Plastika Kritis is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Plastika Kritis has more cash than debt is arguably a good indication that it can manage its debt safely.
And we also note warmly that Plastika Kritis grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Plastika Kritis will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.