Does INCANA Spólka Akcyjna (WSE:ICA) Have A Healthy 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, INCANA Spólka Akcyjna (WSE:ICA) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

View our latest analysis for INCANA Spólka Akcyjna

What Is INCANA Spólka Akcyjna's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 INCANA Spólka Akcyjna had debt of zł6.35m, up from zł5.90m in one year. However, it also had zł3.91m in cash, and so its net debt is zł2.44m.

How Healthy Is INCANA Spólka Akcyjna's Balance Sheet?

The latest balance sheet data shows that INCANA Spólka Akcyjna had liabilities of zł9.18m due within a year, and liabilities of zł3.19m falling due after that. Offsetting these obligations, it had cash of zł3.91m as well as receivables valued at zł3.85m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł4.61m.

Since publicly traded INCANA Spólka Akcyjna shares are worth a total of zł32.5m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

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). 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).

While INCANA Spólka Akcyjna's low debt to EBITDA ratio of 0.85 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 4.6 times last year does give us pause. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Pleasingly, INCANA Spólka Akcyjna is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 173% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is INCANA Spólka Akcyjna'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, INCANA Spólka Akcyjna actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Happily, INCANA Spólka Akcyjna's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. Looking at the bigger picture, we think INCANA Spólka Akcyjna's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. 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. Case in point: We've spotted 4 warning signs for INCANA Spólka Akcyjna you should be aware of, and 2 of them are concerning.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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