Is Patrizia (ETR: PAT) a risky investment?
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Patrizia AG (ETR: PAT) uses debt in his business. But does this debt concern shareholders?
What risk does debt entail?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest analysis for Patrizia
What is Patrizia’s debt?
The image below, which you can click for more details, shows that Patrizia had a debt of 279.9 million euros at the end of June 2021, a reduction of 355.9 million euros over one year. However, his balance sheet shows that he holds 590.0 million euros in cash, so he actually has 310.1 million euros in net cash.
How strong is Patrizia’s balance sheet?
According to the latest published balance sheet, Patrizia had liabilities of 250.2 million euros within 12 months and liabilities of 350.9 million euros due beyond 12 months. On the other hand, it had cash of € 590.0 million and € 212.6 million in receivables within one year. So he actually has 201.5 million euros Following liquid assets as total liabilities.
This surplus suggests that Patrizia has a prudent balance sheet and could likely eliminate her debt without too much difficulty. In short, Patrizia has a net cash flow, so it’s fair to say that she doesn’t have a lot of debt!
In fact, Patrizia’s saving grace is her low level of debt, as her EBIT has fallen 60% in the past twelve months. When it comes to paying down debt, lower income is no more helpful to your health than sugary sodas. When analyzing debt levels, the balance sheet is the obvious starting point. But it’s future profits, more than anything, that will determine Patrizia’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. While Patrizia has net cash on her balance sheet, it’s still worth looking at her ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast she is building (or erodes) that cash balance. . Over the past three years, Patrizia has recorded free cash flow of 57% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.
While we sympathize with investors who find debt worrying, you should keep in mind that Patrizia has € 310.1 million in net cash, as well as more liquid assets than liabilities. We are therefore not concerned with the use of Patrizia’s debt. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 1 warning sign for Patrizia you must be aware.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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 any of the stocks mentioned.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.