Instal Kraków (WSE:INK) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Instal Kraków S.A. (WSE:INK) does use debt in its business. 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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Instal Kraków

What Is Instal Kraków's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Instal Kraków had debt of zł11.5m, up from zł9.91m in one year. However, it does have zł69.0m in cash offsetting this, leading to net cash of zł57.5m.

How Healthy Is Instal Kraków's Balance Sheet?

We can see from the most recent balance sheet that Instal Kraków had liabilities of zł107.9m falling due within a year, and liabilities of zł25.6m due beyond that. Offsetting these obligations, it had cash of zł69.0m as well as receivables valued at zł73.5m due within 12 months. So it can boast zł8.99m more liquid assets than total liabilities.

This short term liquidity is a sign that Instal Kraków could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Instal Kraków has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Instal Kraków has increased its EBIT by 8.3% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Instal Kraków's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Instal Kraków may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Instal Kraków generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Instal Kraków has net cash of zł57.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of zł46m, being 96% of its EBIT. So is Instal Kraków's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 3 warning signs for Instal Kraków you should be aware of.

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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