Is Plaisio Computers (ATH:PLAIS) Using Too Much Debt?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Plaisio Computers S.A. (ATH:PLAIS) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Plaisio Computers
How Much Debt Does Plaisio Computers Carry?
The image below, which you can click on for greater detail, shows that Plaisio Computers had debt of €11.3m at the end of December 2018, a reduction from €12.9m over a year. However, its balance sheet shows it holds €40.8m in cash, so it actually has €29.6m net cash.
How Healthy Is Plaisio Computers's Balance Sheet?
We can see from the most recent balance sheet that Plaisio Computers had liabilities of €46.2m falling due within a year, and liabilities of €14.3m due beyond that. Offsetting this, it had €40.8m in cash and €23.5m in receivables that were due within 12 months. So it can boast €3.85m more liquid assets than total liabilities.
This surplus suggests that Plaisio Computers has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Plaisio Computers has more cash than debt is arguably a good indication that it can manage its debt safely.
Unfortunately, Plaisio Computers's EBIT flopped 16% over the last four quarters. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Plaisio Computers 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Plaisio Computers may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Plaisio Computers created free cash flow amounting to 8.1% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.
Summing up
While it is always sensible to investigate a company's debt, in this case Plaisio Computers has €30m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Plaisio Computers's balance sheet. Over time, share prices tend to follow earnings per share, so if you're interested in Plaisio Computers, you may well want to click here to check an interactive graph of its earnings per share history.
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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
