Is Ekopol Górnoslaski Holding (WSE:EGH) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Ekopol Górnoslaski Holding S.A. (WSE:EGH) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Ekopol Górnoslaski Holding

What Is Ekopol Górnoslaski Holding's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Ekopol Górnoslaski Holding had debt of zł6.20m, up from zł5.82m in one year. However, it does have zł11.9m in cash offsetting this, leading to net cash of zł5.65m.

How Healthy Is Ekopol Górnoslaski Holding's Balance Sheet?

The latest balance sheet data shows that Ekopol Górnoslaski Holding had liabilities of zł19.7m due within a year, and liabilities of zł3.34m falling due after that. Offsetting these obligations, it had cash of zł11.9m as well as receivables valued at zł6.02m due within 12 months. So its liabilities total zł5.16m more than the combination of its cash and short-term receivables.

Since publicly traded Ekopol Górnoslaski Holding shares are worth a total of zł28.0m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Ekopol Górnoslaski Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Ekopol Górnoslaski Holding grew its EBIT by 365% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ekopol Górnoslaski Holding'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 company can only pay off debt with cold hard cash, not accounting profits. Ekopol Górnoslaski Holding 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. During the last three years, Ekopol Górnoslaski Holding produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While Ekopol Górnoslaski Holding does have more liabilities than liquid assets, it also has net cash of zł5.65m. And we liked the look of last year's 365% year-on-year EBIT growth. So is Ekopol Górnoslaski Holding's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Ekopol Górnoslaski Holding has 4 warning signs (and 3 which don't sit too well with us) we think you should know about.

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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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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