These 4 Measures Indicate That Patentus (WSE:PAT) Is Using Debt Safely

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 note that Patentus S.A. (WSE:PAT) 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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Patentus

What Is Patentus's Debt?

The image below, which you can click on for greater detail, shows that Patentus had debt of zł9.23m at the end of March 2024, a reduction from zł23.7m over a year. However, its balance sheet shows it holds zł12.7m in cash, so it actually has zł3.48m net cash.

A Look At Patentus' Liabilities

According to the last reported balance sheet, Patentus had liabilities of zł24.1m due within 12 months, and liabilities of zł17.8m due beyond 12 months. On the other hand, it had cash of zł12.7m and zł8.87m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł20.2m.

Of course, Patentus has a market capitalization of zł160.8m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Patentus also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Patentus grew its EBIT by 423% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Patentus 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Patentus 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. Happily for any shareholders, Patentus actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Patentus's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł3.48m. The cherry on top was that in converted 148% of that EBIT to free cash flow, bringing in zł121m. So is Patentus's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Patentus , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com