We Think Energoinstal (WSE:ENI) Can Manage Its Debt With Ease

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 Energoinstal S.A. (WSE:ENI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Energoinstal

What Is Energoinstal's Debt?

The image below, which you can click on for greater detail, shows that Energoinstal had debt of zł6.18m at the end of September 2020, a reduction from zł6.86m over a year. However, its balance sheet shows it holds zł7.01m in cash, so it actually has zł828.0k net cash.

How Strong Is Energoinstal's Balance Sheet?

The latest balance sheet data shows that Energoinstal had liabilities of zł31.3m due within a year, and liabilities of zł20.2m falling due after that. On the other hand, it had cash of zł7.01m and zł33.4m worth of receivables due within a year. So it has liabilities totalling zł11.2m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Energoinstal has a market capitalization of zł26.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Energoinstal also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Energoinstal grew its EBIT by 240% 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 Energoinstal'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Energoinstal 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. Happily for any shareholders, Energoinstal actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Energoinstal does have more liabilities than liquid assets, it also has net cash of zł828.0k. The cherry on top was that in converted 142% of that EBIT to free cash flow, bringing in zł2.7m. So we don't think Energoinstal's use of debt is risky. 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. Be aware that Energoinstal is showing 3 warning signs in our investment analysis , and 2 of those can't be ignored...

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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