Pozbud T&R Spolka Akcyjna (WSE:POZ) Seems To Use Debt Quite Sensibly

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.' 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 real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Pozbud T&R Spolka Akcyjna

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

The image below, which you can click on for greater detail, shows that at December 2020 Pozbud T&R Spolka Akcyjna had debt of zł79.3m, up from zł70.9m in one year. On the flip side, it has zł47.2m in cash leading to net debt of about zł32.1m.

A Look At Pozbud T&R Spolka Akcyjna's Liabilities

The latest balance sheet data shows that Pozbud T&R Spolka Akcyjna had liabilities of zł207.9m due within a year, and liabilities of zł94.4m falling due after that. Offsetting this, it had zł47.2m in cash and zł231.7m in receivables that were due within 12 months. So it has liabilities totalling zł23.4m more than its cash and near-term receivables, combined.

Of course, Pozbud T&R Spolka Akcyjna has a market capitalization of zł129.6m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

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 has net debt of just 0.59 times EBITDA, indicating that it is certainly not a reckless borrower. And it boasts interest cover of 8.1 times, which is more than adequate. In addition to that, we're happy to report that Pozbud T&R Spolka Akcyjna has boosted its EBIT by 85%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Pozbud T&R Spolka Akcyjna'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, Pozbud T&R Spolka Akcyjna's free cash flow amounted to 42% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

The good news is that Pozbud T&R Spolka Akcyjna's demonstrated ability to grow its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its net debt to EBITDA also supports that impression! Taking all this data into account, it seems to us that Pozbud T&R Spolka Akcyjna takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Pozbud T&R Spolka Akcyjna (of which 1 makes us a bit uncomfortable!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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