Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Mostostal Warszawa
How Much Debt Does Mostostal Warszawa Carry?
You can click the graphic below for the historical numbers, but it shows that Mostostal Warszawa had zł134.2m of debt in June 2021, down from zł197.1m, one year before. However, it does have zł144.0m in cash offsetting this, leading to net cash of zł9.87m.
How Strong Is Mostostal Warszawa's Balance Sheet?
The latest balance sheet data shows that Mostostal Warszawa had liabilities of zł747.7m due within a year, and liabilities of zł126.4m falling due after that. Offsetting this, it had zł144.0m in cash and zł626.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł103.4m.
This is a mountain of leverage relative to its market capitalization of zł159.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Mostostal Warszawa boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Mostostal Warszawa grew its EBIT by 1,556% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 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, a company can only pay off debt with cold hard cash, not accounting profits. Mostostal Warszawa 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. Over the last two years, Mostostal Warszawa actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
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 zł9.87m. The cherry on top was that in converted 483% of that EBIT to free cash flow, bringing in zł106m. So is Mostostal Warszawa's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Mostostal Warszawa 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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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.
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About WSE:MSW
Mostostal Warszawa
Operates in the construction industry in Poland and internationally.
Flawless balance sheet and good value.
