Is Grupa Kapitalowa IMMOBILE (WSE:GKI) Using Too Much Debt?

Warren Buffett famously said, '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 can see that Grupa Kapitalowa IMMOBILE S.A. (WSE:GKI) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Grupa Kapitalowa IMMOBILE

What Is Grupa Kapitalowa IMMOBILE's Net Debt?

As you can see below, at the end of March 2022, Grupa Kapitalowa IMMOBILE had zł235.2m of debt, up from zł161.6m a year ago. Click the image for more detail. However, it also had zł16.2m in cash, and so its net debt is zł219.0m.

A Look At Grupa Kapitalowa IMMOBILE's Liabilities

We can see from the most recent balance sheet that Grupa Kapitalowa IMMOBILE had liabilities of zł422.8m falling due within a year, and liabilities of zł358.3m due beyond that. Offsetting these obligations, it had cash of zł16.2m as well as receivables valued at zł165.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł599.9m.

The deficiency here weighs heavily on the zł114.7m 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 definitely think shareholders need to watch this one closely. At the end of the day, Grupa Kapitalowa IMMOBILE would probably need a major re-capitalization if its creditors were to demand repayment.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With a net debt to EBITDA ratio of 7.9, it's fair to say Grupa Kapitalowa IMMOBILE does have a significant amount of debt. However, its interest coverage of 5.5 is reasonably strong, which is a good sign. Importantly, Grupa Kapitalowa IMMOBILE grew its EBIT by 50% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Grupa Kapitalowa IMMOBILE'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Grupa Kapitalowa IMMOBILE generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

We feel some trepidation about Grupa Kapitalowa IMMOBILE's difficulty level of total liabilities, but we've got positives to focus on, too. For example, its conversion of EBIT to free cash flow and EBIT growth rate give us some confidence in its ability to manage its debt. We think that Grupa Kapitalowa IMMOBILE's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Grupa Kapitalowa IMMOBILE is showing 4 warning signs in our investment analysis , and 2 of those are concerning...

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.