Does Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING (WSE:FSG) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING S.A. (WSE:FSG) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING

How Much Debt Does Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING Carry?

As you can see below, at the end of September 2024, Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING had zł54.0m of debt, up from zł49.5m a year ago. Click the image for more detail. However, it does have zł2.99m in cash offsetting this, leading to net debt of about zł51.1m.

A Look At Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING's Liabilities

Zooming in on the latest balance sheet data, we can see that Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING had liabilities of zł114.0m due within 12 months and liabilities of zł12.5m due beyond that. Offsetting these obligations, it had cash of zł2.99m as well as receivables valued at zł67.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł55.7m.

When you consider that this deficiency exceeds the company's zł39.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING has net debt of just 1.4 times EBITDA, suggesting it could ramp leverage without breaking a sweat. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So there's no doubt this company can take on debt while staying cool as a cucumber. But the other side of the story is that Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING saw its EBIT decline by 3.1% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING's level of total liabilities and EBIT growth rate definitely weigh on it, in our esteem. But its interest cover tells a very different story, and suggests some resilience. When we consider all the factors discussed, it seems to us that Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. 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. For instance, we've identified 2 warning signs for Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.