Is Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING (WSE:FSG) Using Too Much Debt?

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 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at 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 zł69.3m of debt at December 2020, down from zł78.4m a year prior. However, it also had zł20.2m in cash, and so its net debt is zł49.1m.

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 zł64.9m due within 12 months, and liabilities of zł62.9m due beyond 12 months. Offsetting these obligations, it had cash of zł20.2m as well as receivables valued at zł75.0m due within 12 months. So it has liabilities totalling zł32.6m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of zł40.1m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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). 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 worth 1.9 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 5.3 times the interest expense. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. Shareholders should be aware that Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING's EBIT was down 60% 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. 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 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING reported free cash flow worth 13% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

We'd go so far as to say Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING's EBIT growth rate was disappointing. But at least its net debt to EBITDA is not so bad. Overall, it seems to us that Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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