Here's Why Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING (WSE:FSG) Has A Meaningful Debt Burden

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING S.A. (WSE:FSG) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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, Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING had zł44.5m of debt at September 2020, down from zł55.0m a year prior. On the flip side, it has zł20.7m in cash leading to net debt of about zł23.8m.

How Strong Is Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING's Balance Sheet?

According to the last reported balance sheet, Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING had liabilities of zł68.1m due within 12 months, and liabilities of zł56.0m due beyond 12 months. On the other hand, it had cash of zł20.7m and zł97.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł6.30m.

Since publicly traded Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING shares are worth a total of zł35.7m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

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.

While Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING has a quite reasonable net debt to EBITDA multiple of 1.6, its interest cover seems weak, at 0.85. The main reason for this is that it has such high depreciation and amortisation. These charges may be non-cash, so they could be excluded when it comes to paying down debt. But the accounting charges are there for a reason -- some assets are seen to be losing value. Either way there's no doubt the stock is using meaningful leverage. Shareholders should be aware that Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING's EBIT was down 92% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

On the face of it, Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING's interest cover left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability handle its debt, based on its EBITDA, isn't such a worry. Once we consider all the factors above, together, it seems to us that Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING (of which 1 is concerning!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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