We Think Grodno Spólka Akcyjna (WSE:GRN) Can Stay On Top Of Its Debt

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. Importantly, Grodno Spólka Akcyjna (WSE:GRN) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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, plenty of companies use debt to fund growth, without any negative consequences. 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 Grodno Spólka Akcyjna

How Much Debt Does Grodno Spólka Akcyjna Carry?

You can click the graphic below for the historical numbers, but it shows that Grodno Spólka Akcyjna had zł49.9m of debt in June 2020, down from zł64.1m, one year before. However, it also had zł3.99m in cash, and so its net debt is zł45.9m.

How Strong Is Grodno Spólka Akcyjna's Balance Sheet?

According to the last reported balance sheet, Grodno Spólka Akcyjna had liabilities of zł170.8m due within 12 months, and liabilities of zł32.2m due beyond 12 months. On the other hand, it had cash of zł3.99m and zł94.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł104.7m.

Grodno Spólka Akcyjna has a market capitalization of zł216.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Grodno Spólka Akcyjna's net debt to EBITDA ratio of about 1.6 suggests only moderate use of debt. And its commanding EBIT of 18.7 times its interest expense, implies the debt load is as light as a peacock feather. On top of that, Grodno Spólka Akcyjna grew its EBIT by 86% 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 you can't view debt in total isolation; since Grodno Spólka Akcyjna 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Grodno Spólka Akcyjna recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Grodno Spólka Akcyjna's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its level of total liabilities. All these things considered, it appears that Grodno Spólka Akcyjna can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Grodno Spólka Akcyjna , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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