Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Mostostal Zabrze S.A. (WSE:MSZ) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
See our latest analysis for Mostostal Zabrze
What Is Mostostal Zabrze's Net Debt?
As you can see below, at the end of June 2021, Mostostal Zabrze had zł34.1m of debt, up from zł29.9m a year ago. Click the image for more detail. But on the other hand it also has zł34.5m in cash, leading to a zł356.0k net cash position.
How Strong Is Mostostal Zabrze's Balance Sheet?
According to the last reported balance sheet, Mostostal Zabrze had liabilities of zł303.9m due within 12 months, and liabilities of zł56.1m due beyond 12 months. Offsetting these obligations, it had cash of zł34.5m as well as receivables valued at zł293.0m due within 12 months. So its liabilities total zł32.5m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Mostostal Zabrze has a market capitalization of zł151.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Mostostal Zabrze also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Mostostal Zabrze has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Mostostal Zabrze 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 three years, Mostostal Zabrze recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
Summing up
While Mostostal Zabrze does have more liabilities than liquid assets, it also has net cash of zł356.0k. And we liked the look of last year's 47% year-on-year EBIT growth. So we are not troubled with Mostostal Zabrze's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Mostostal Zabrze .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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:MSZ
Mostostal Zabrze
Engages in the design, production, construction, and assembly activities.
Flawless balance sheet with solid track record.
