Grupa Kapitalowa IMMOBILE (WSE:GKI) Has A Somewhat Strained Balance Sheet

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.' 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. We note that Grupa Kapitalowa IMMOBILE S.A. (WSE:GKI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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, 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.

See our latest analysis for Grupa Kapitalowa IMMOBILE

How Much Debt Does Grupa Kapitalowa IMMOBILE Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Grupa Kapitalowa IMMOBILE had zł257.0m of debt, an increase on zł245.6m, over one year. However, because it has a cash reserve of zł15.2m, its net debt is less, at about zł241.9m.

How Healthy Is Grupa Kapitalowa IMMOBILE's Balance Sheet?

We can see from the most recent balance sheet that Grupa Kapitalowa IMMOBILE had liabilities of zł450.7m falling due within a year, and liabilities of zł284.0m due beyond that. On the other hand, it had cash of zł15.2m and zł167.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł552.2m.

The deficiency here weighs heavily on the zł161.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Grupa Kapitalowa IMMOBILE would probably need a major re-capitalization if its creditors were to demand repayment.

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.

Weak interest cover of 0.55 times and a disturbingly high net debt to EBITDA ratio of 7.6 hit our confidence in Grupa Kapitalowa IMMOBILE like a one-two punch to the gut. The debt burden here is substantial. Worse, Grupa Kapitalowa IMMOBILE's EBIT was down 46% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Grupa Kapitalowa IMMOBILE's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Happily for any shareholders, Grupa Kapitalowa IMMOBILE 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.

Our View

On the face of it, Grupa Kapitalowa IMMOBILE's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. After considering the datapoints discussed, we think Grupa Kapitalowa IMMOBILE has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Grupa Kapitalowa IMMOBILE (2 are potentially serious) you should be aware of.

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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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.