APS Energia (WSE:APE) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies APS Energia SA (WSE:APE) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for APS Energia

What Is APS Energia's Net Debt?

You can click the graphic below for the historical numbers, but it shows that APS Energia had zł7.02m of debt in March 2023, down from zł12.4m, one year before. But it also has zł13.3m in cash to offset that, meaning it has zł6.32m net cash.

How Strong Is APS Energia's Balance Sheet?

We can see from the most recent balance sheet that APS Energia had liabilities of zł37.4m falling due within a year, and liabilities of zł20.0m due beyond that. On the other hand, it had cash of zł13.3m and zł17.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł26.3m.

While this might seem like a lot, it is not so bad since APS Energia has a market capitalization of zł84.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, APS Energia also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that APS Energia's load is not too heavy, because its EBIT was down 75% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is APS Energia's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While APS Energia has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, APS Energia actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although APS Energia's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł6.32m. And it impressed us with free cash flow of zł21m, being 161% of its EBIT. So we are not troubled with APS Energia's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with APS Energia .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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.