Is Pozbud T&R Spolka Akcyjna (WSE:POZ) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Pozbud T&R Spolka Akcyjna (WSE:POZ) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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.

View our latest analysis for Pozbud T&R Spolka Akcyjna

What Is Pozbud T&R Spolka Akcyjna's Net Debt?

As you can see below, Pozbud T&R Spolka Akcyjna had zł79.4m of debt at June 2021, down from zł97.7m a year prior. However, it also had zł3.64m in cash, and so its net debt is zł75.8m.

How Strong Is Pozbud T&R Spolka Akcyjna's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pozbud T&R Spolka Akcyjna had liabilities of zł176.3m due within 12 months and liabilities of zł92.5m due beyond that. On the other hand, it had cash of zł3.64m and zł250.8m worth of receivables due within a year. So it has liabilities totalling zł14.3m more than its cash and near-term receivables, combined.

Of course, Pozbud T&R Spolka Akcyjna has a market capitalization of zł197.3m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Pozbud T&R Spolka Akcyjna's net debt of 1.7 times EBITDA suggests graceful use of debt. And the fact that its trailing twelve months of EBIT was 8.6 times its interest expenses harmonizes with that theme. The bad news is that Pozbud T&R Spolka Akcyjna saw its EBIT decline by 16% over the last year. If that sort of decline is not arrested, then the managing its debt will be harder than selling broccoli flavoured ice-cream for a premium. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pozbud T&R Spolka Akcyjna's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Pozbud T&R Spolka Akcyjna recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

Both Pozbud T&R Spolka Akcyjna's EBIT growth rate and its conversion of EBIT to free cash flow were discouraging. But its not so bad at covering its interest expense with its EBIT. Taking the abovementioned factors together we do think Pozbud T&R Spolka Akcyjna's debt poses some risks to the business. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. 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. For example - Pozbud T&R Spolka Akcyjna has 1 warning sign we think 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.

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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