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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING S.A. (WSE:FSG) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

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

What Is Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING's Debt?

As you can see below, Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING had zł59.1m of debt at June 2023, down from zł80.3m a year prior. However, it does have zł18.2m in cash offsetting this, leading to net debt of about zł40.9m.

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

Zooming in on the latest balance sheet data, we can see that Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING had liabilities of zł141.6m due within 12 months and liabilities of zł14.7m due beyond that. On the other hand, it had cash of zł18.2m and zł75.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł62.9m.

When you consider that this deficiency exceeds the company's zł43.3m 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 measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING has a very low debt to EBITDA ratio of 1.3 so it is strange to see weak interest coverage, with last year's EBIT being only 1.2 times the interest expense. So while we're not necessarily alarmed we think that its debt is far from trivial. Notably, Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING's EBIT launched higher than Elon Musk, gaining a whopping 206% on last year. 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 we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Looking at the most recent three years, Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

To be frank both Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING's level of total liabilities and its track record of covering its interest expense with its EBIT make us rather uncomfortable with its debt levels. But at least it's pretty decent at growing its EBIT; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING stock 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. 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 Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING is showing 3 warning signs in our investment analysis , and 1 of those is significant...

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. 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.