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

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.' 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, Mostostal Warszawa S.A. (WSE:MSW) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Mostostal Warszawa's Net Debt?

The chart below, which you can click on for greater detail, shows that Mostostal Warszawa had zł223.6m in debt in December 2024; about the same as the year before. However, it does have zł164.3m in cash offsetting this, leading to net debt of about zł59.4m.

How Healthy Is Mostostal Warszawa's Balance Sheet?

According to the last reported balance sheet, Mostostal Warszawa had liabilities of zł840.3m due within 12 months, and liabilities of zł143.1m due beyond 12 months. On the other hand, it had cash of zł164.3m and zł537.8m worth of receivables due within a year. So it has liabilities totalling zł281.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the zł166.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Mostostal Warszawa would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Mostostal Warszawa 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.

See our latest analysis for Mostostal Warszawa

In the last year Mostostal Warszawa had a loss before interest and tax, and actually shrunk its revenue by 5.8%, to zł1.6b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Mostostal Warszawa produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping zł24m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through zł68m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Mostostal Warszawa (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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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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.