We Think Mostostal Zabrze (WSE:MSZ) Can Manage Its Debt With Ease

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 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 note that Mostostal Zabrze S.A. (WSE:MSZ) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Mostostal Zabrze

What Is Mostostal Zabrze's Net Debt?

The image below, which you can click on for greater detail, shows that Mostostal Zabrze had debt of zł11.1m at the end of September 2022, a reduction from zł29.8m over a year. But on the other hand it also has zł65.8m in cash, leading to a zł54.7m net cash position.

A Look At Mostostal Zabrze's Liabilities

The latest balance sheet data shows that Mostostal Zabrze had liabilities of zł425.5m due within a year, and liabilities of zł56.3m falling due after that. Offsetting this, it had zł65.8m in cash and zł378.5m in receivables that were due within 12 months. So its liabilities total zł37.5m more than the combination of its cash and short-term receivables.

Mostostal Zabrze has a market capitalization of zł173.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. 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 42%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Mostostal Zabrze can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Mostostal Zabrze produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Mostostal Zabrze's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł54.7m. And it impressed us with its EBIT growth of 42% over the last year. So we don't think Mostostal Zabrze'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. For example Mostostal Zabrze has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.