Is Mostostal Warszawa (WSE:MSW) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Mostostal Warszawa S.A. (WSE:MSW) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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.

View our latest analysis for Mostostal Warszawa

What Is Mostostal Warszawa's Debt?

As you can see below, Mostostal Warszawa had zł143.1m of debt at September 2021, down from zł200.3m a year prior. However, it does have zł204.5m in cash offsetting this, leading to net cash of zł61.4m.

A Look At Mostostal Warszawa's Liabilities

According to the last reported balance sheet, Mostostal Warszawa had liabilities of zł786.3m due within 12 months, and liabilities of zł116.1m due beyond 12 months. Offsetting this, it had zł204.5m in cash and zł582.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł115.2m.

This deficit is considerable relative to its market capitalization of zł126.0m, so it does suggest shareholders should keep an eye on Mostostal Warszawa's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Mostostal Warszawa also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Mostostal Warszawa grew its EBIT by 1,064% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mostostal Warszawa'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Mostostal Warszawa has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Mostostal Warszawa actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Mostostal Warszawa's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł61.4m. The cherry on top was that in converted 697% of that EBIT to free cash flow, bringing in zł146m. So we don't think Mostostal Warszawa's use of debt is risky. 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 Mostostal Warszawa is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.