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Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies PGF Polska Grupa Fotowoltaiczna SA (WSE: PGV) uses debt. But the most important question is: what risk does this debt create?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for PGF Polska Grupa Fotowoltaiczna
What is the debt of PGF Polska Grupa Fotowoltaiczna?
As you can see below, at the end of June 2021, PGF Polska Grupa Fotowoltaiczna had a debt of 6.45 million z, up from zero a year ago. Click on the image for more details. On the other hand, he has 567.0000 z in cash, resulting in a net debt of about 5.88 million z.
How strong is PGF Polska Grupa Fotowoltaiczna’s balance sheet?
The latest balance sheet data shows that PGF Polska Grupa Fotowoltaiczna had a liability of Z 19.2 million due within one year, and a liability of Z 34.5 million due after that. On the other hand, he had cash of z 567.0,000 and z 29.6 million of receivables due within one year. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by Z 23.6 million.
Of course, PGF Polska Grupa Fotowoltaiczna has a market cap of Z 145.5 million, so these liabilities are probably manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
PGF Polska Grupa Fotowoltaiczna shareholders face the double whammy of a high net debt / EBITDA ratio (69.6) and fairly low interest coverage, since EBIT is only 2.1 times interest charges. This means that we would consider him to be in heavy debt. However, the positive side is that PGF Polska Grupa Fotowoltaiczna achieved a positive EBIT of 83,000 z in the last twelve months, an improvement over the loss of the previous year. There is no doubt that we learn the most about debt from the balance sheet. But it is the results of PGF Polska Grupa Fotowoltaiczna that will influence the way the balance sheet is held in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent earnings before interest and taxes (EBIT) is supported by free cash flow. Over the past year, PGF Polska Grupa Fotowoltaiczna has spent a lot of money. While investors no doubt expect this situation to reverse in due course, this clearly means its use of debt is riskier.
Our point of view
At first glance, PGF Polska Grupa Fotowoltaiczna’s net debt to EBITDA left us hesitant about the stock, and its conversion from EBIT to free cash flow was no more attractive than the one empty restaurant in the world. busiest night of the year. That said, his ability to manage his total liabilities isn’t that much of a concern. From a broader perspective, it seems clear to us that the use of debt by PGF Polska Grupa Fotowoltaiczna creates risks for the company. If all goes well, this should increase returns, but on the other hand, the risk of permanent capital loss is increased by debt. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 4 warning signs with PGF Polska Grupa Fotowoltaiczna (at least 1 which should not be ignored), and understanding them should be part of your investment process.
If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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