Is Pozbud T&R Spolka Akcyjna (WSE:POZ) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Pozbud T&R Spolka Akcyjna (WSE:POZ) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Pozbud T&R Spolka Akcyjna

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

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Pozbud T&R Spolka Akcyjna had zł96.6m of debt, an increase on zł80.1m, over one year. However, it does have zł3.30m in cash offsetting this, leading to net debt of about zł93.3m.

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

The latest balance sheet data shows that Pozbud T&R Spolka Akcyjna had liabilities of zł167.2m due within a year, and liabilities of zł88.4m falling due after that. Offsetting this, it had zł3.30m in cash and zł209.4m in receivables that were due within 12 months. So it has liabilities totalling zł42.9m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Pozbud T&R Spolka Akcyjna is worth zł116.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Pozbud T&R Spolka Akcyjna's net debt to EBITDA ratio of about 2.0 suggests only moderate use of debt. And its strong interest cover of 13.7 times, makes us even more comfortable. Pleasingly, Pozbud T&R Spolka Akcyjna is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 141% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Pozbud T&R Spolka Akcyjna 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Pozbud T&R Spolka Akcyjna burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Based on what we've seen Pozbud T&R Spolka Akcyjna is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its interest cover. Looking at all this data makes us feel a little cautious about Pozbud T&R Spolka Akcyjna's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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 Pozbud T&R Spolka Akcyjna has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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