Does Pamapol (WSE: PMP) have a healthy track record?

David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ 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. We can see that Pamapol SA (WSE: PMP) uses debt in his business. But the most important question is: what risk does this debt create?

When is Debt a Problem?

Debts and other liabilities become risky for a business when it cannot easily meet these 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 ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest review for Pamapol

What is Pamapol’s debt?

The image below, which you can click for more details, shows that in September 2021, Pamapol had a debt of Z 116.4million, compared to Z 106.1million in a year. However, because it has a cash reserve of Z 8.33 million, its net debt is less, at around Z 108.0 million.

WSE: PMP History of debt to equity January 5, 2022

A look at the responsibilities of Pamapol

The latest balance sheet data shows that Pamapol had z257.1million liabilities due within one year, and z79.1million liabilities due after that. In compensation for these obligations, he had cash of 8.33 million z as well as receivables valued at 99.4 million z due within 12 months. Thus, its liabilities total Z 228.5 million more than the combination of its cash and short-term receivables.

The lack here weighs heavily on the Z89.3million business itself, as if a child struggles under the weight of a huge backpack full of books, his gym gear, and a trumpet. . We therefore believe that shareholders should monitor it closely. Ultimately, Pamapol would likely need a major recapitalization if its creditors demanded repayment.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Pamapol’s debt is 3.3 times its EBITDA and its EBIT covers its interest charges 4.4 times more. This suggests that while debt levels are significant, we would stop calling them problematic. On a lighter note, note that Pamapol increased its EBIT by 26% last year. If he manages to maintain this kind of improvement, his debt will begin to melt like glaciers in a warming world. There is no doubt that we learn the most about debt from the balance sheet. But it is Pamapol’s profits that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Looking at the past three years, Pamapol has actually experienced a cash outflow, overall. Debt is much riskier for companies with unreliable free cash flow, so shareholders should hope that past spending will produce free cash flow in the future.

Our point of view

At first glance, Pamapol’s conversion of EBIT to free cash flow left us hesitant about the stock, and its total liability level was no more appealing than the single empty restaurant on the busiest night of the year. year. But on the bright side, its EBIT growth rate is a good sign and makes us more optimistic. Overall, it seems to us that Pamapol’s balance sheet is really very risky for the company. For this reason, we are fairly cautious about the stock, and we believe shareholders should keep a close eye on its liquidity. 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 off the balance sheet. For example, we have identified 3 warning signs for Pamapol that you need to be aware of.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

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 any stock 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 any of the stocks mentioned.

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