Does Mostostal Zabrze (WSE:MSZ) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that Mostostal Zabrze S.A. (WSE:MSZ) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Mostostal Zabrze

What Is Mostostal Zabrze's Debt?

The image below, which you can click on for greater detail, shows that Mostostal Zabrze had debt of zł14.4m at the end of March 2022, a reduction from zł32.2m over a year. But on the other hand it also has zł51.4m in cash, leading to a zł36.9m net cash position.

How Healthy Is Mostostal Zabrze's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mostostal Zabrze had liabilities of zł297.1m due within 12 months and liabilities of zł56.3m due beyond that. Offsetting these obligations, it had cash of zł51.4m as well as receivables valued at zł287.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł14.6m.

Given Mostostal Zabrze has a market capitalization of zł132.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Mostostal Zabrze boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Mostostal Zabrze grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mostostal Zabrze'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Mostostal Zabrze 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. In the last three years, Mostostal Zabrze's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Mostostal Zabrze does have more liabilities than liquid assets, it also has net cash of zł36.9m. And it impressed us with its EBIT growth of 35% over the last year. So is Mostostal Zabrze'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 1 warning sign for Mostostal Zabrze you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.