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.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Kancelaria Medius S.A. (WSE:KME) 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Kancelaria Medius Carry?
The image below, which you can click on for greater detail, shows that Kancelaria Medius had debt of zł90.3m at the end of March 2020, a reduction from zł99.4m over a year. However, its balance sheet shows it holds zł142.4m in cash, so it actually has zł52.1m net cash.
A Look At Kancelaria Medius’s Liabilities
We can see from the most recent balance sheet that Kancelaria Medius had liabilities of zł41.5m falling due within a year, and liabilities of zł62.9m due beyond that. Offsetting these obligations, it had cash of zł142.4m as well as receivables valued at zł7.27m due within 12 months. So it can boast zł45.3m more liquid assets than total liabilities.
This luscious liquidity implies that Kancelaria Medius’s balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Kancelaria Medius boasts net cash, so it’s fair to say it does not have a heavy debt load!
Importantly, Kancelaria Medius grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since Kancelaria Medius will need earnings to service that debt. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Kancelaria Medius 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. Considering the last three years, Kancelaria Medius actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
While it is always sensible to investigate a company’s debt, in this case Kancelaria Medius has zł52.1m in net cash and a strong balance sheet. And we liked the look of last year’s 44% year-on-year EBIT growth. So is Kancelaria Medius’s debt a risk? It doesn’t seem so to us. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. Consider for instance, the ever-present spectre of investment risk. We’ve identified 3 warning signs with Kancelaria Medius (at least 2 which are potentially serious) , and understanding them should be part of your investment process.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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