Does Prodways Group (EPA:PWG) have a healthy balance sheet?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We can see that Prodways Group SA (EPA:PWG) uses debt in its business. But the more important question is: what risk does this debt create?
Why is debt risky?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
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What is Prodways Group’s debt?
The image below, which you can click on for more details, shows that in June 2022, Prodways Group had a debt of €17.2m, compared to €16.4m in one year. But on the other hand, he also has 18.9 million euros in cash, which leads to a net cash of 1.66 million euros.
How strong is Prodways Group’s balance sheet?
The latest balance sheet data show that Prodways Group had liabilities of €27.3 million at less than one year and liabilities of €21.2 million at later maturity. On the other hand, it had €18.9 million in cash and €15.0 million in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €14.6 million.
Of course, Prodways Group has a market capitalization of €183.9m, so these liabilities are probably manageable. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. Although it has liabilities to note, Prodways Group also has more cash than debt, so we are quite confident that it can manage its debt safely.
Although Prodways Group recorded an EBIT loss last year, it was also good to see that it generated €7.5 million in EBIT over the last twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But it is ultimately the company’s future profitability that will decide whether Prodways Group can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, while the taxman may love accounting profits, lenders only accept cash. Prodways Group may have net cash on the balance sheet, but it is always interesting to see the extent to which the company converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its need and its capacity. to manage debt. Over the most recent year, Prodways Group recorded free cash flow of 48% of its EBIT, which is weaker than expected. It’s not great when it comes to paying off debt.
While it is always wise to look at a company’s total liabilities, it is very reassuring that Prodways Group has €1.66 million in net cash. We therefore have no problem with the use of debt by Prodways Group. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Prodways Group you should know.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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