Przedsiebiorstwo Hydrauliki Silowej HYDROTOR (WSE:HDR) Has A Somewhat Strained Balance Sheet

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 Przedsiebiorstwo Hydrauliki Silowej HYDROTOR S.A. (WSE:HDR) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Przedsiebiorstwo Hydrauliki Silowej HYDROTOR

What Is Przedsiebiorstwo Hydrauliki Silowej HYDROTOR's Net Debt?

As you can see below, Przedsiebiorstwo Hydrauliki Silowej HYDROTOR had zł10.3m of debt at June 2023, down from zł12.5m a year prior. On the flip side, it has zł559.0k in cash leading to net debt of about zł9.72m.

A Look At Przedsiebiorstwo Hydrauliki Silowej HYDROTOR's Liabilities

We can see from the most recent balance sheet that Przedsiebiorstwo Hydrauliki Silowej HYDROTOR had liabilities of zł42.5m falling due within a year, and liabilities of zł37.3m due beyond that. On the other hand, it had cash of zł559.0k and zł36.2m worth of receivables due within a year. So it has liabilities totalling zł43.0m more than its cash and near-term receivables, combined.

Przedsiebiorstwo Hydrauliki Silowej HYDROTOR has a market capitalization of zł81.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Przedsiebiorstwo Hydrauliki Silowej HYDROTOR has a very low debt to EBITDA ratio of 0.67 so it is strange to see weak interest coverage, with last year's EBIT being only 2.2 times the interest expense. So while we're not necessarily alarmed we think that its debt is far from trivial. Shareholders should be aware that Przedsiebiorstwo Hydrauliki Silowej HYDROTOR's EBIT was down 71% 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 Przedsiebiorstwo Hydrauliki Silowej HYDROTOR'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, Przedsiebiorstwo Hydrauliki Silowej HYDROTOR recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

On the face of it, Przedsiebiorstwo Hydrauliki Silowej HYDROTOR's interest cover left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at managing its debt, based on its EBITDA,; that's encouraging. Looking at the bigger picture, it seems clear to us that Przedsiebiorstwo Hydrauliki Silowej HYDROTOR's use of debt is creating risks for the company. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Przedsiebiorstwo Hydrauliki Silowej HYDROTOR 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.