Is Polimex-Mostostal (WSE:PXM) Using Too Much Debt?

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 note that Polimex-Mostostal S.A. (WSE:PXM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Polimex-Mostostal

What Is Polimex-Mostostal's Net Debt?

The image below, which you can click on for greater detail, shows that Polimex-Mostostal had debt of zł190.9m at the end of September 2024, a reduction from zł217.8m over a year. But it also has zł493.1m in cash to offset that, meaning it has zł302.2m net cash.

How Strong Is Polimex-Mostostal's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Polimex-Mostostal had liabilities of zł2.21b due within 12 months and liabilities of zł189.7m due beyond that. Offsetting these obligations, it had cash of zł493.1m as well as receivables valued at zł1.32b due within 12 months. So its liabilities total zł584.9m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's zł525.0m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Polimex-Mostostal has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Polimex-Mostostal 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.

In the last year Polimex-Mostostal had a loss before interest and tax, and actually shrunk its revenue by 25%, to zł2.5b. To be frank that doesn't bode well.

So How Risky Is Polimex-Mostostal?

Although Polimex-Mostostal had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of zł299m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. 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 3 warning signs with Polimex-Mostostal (at least 1 which is significant) , 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.