Polimex-Mostostal (WSE:PXM) Could Easily Take On More 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.' 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. We note that Polimex-Mostostal S.A. (WSE:PXM) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Polimex-Mostostal

What Is Polimex-Mostostal's Net Debt?

As you can see below, Polimex-Mostostal had zł182.8m of debt at September 2021, down from zł442.3m a year prior. However, it does have zł671.4m in cash offsetting this, leading to net cash of zł488.6m.

How Healthy Is Polimex-Mostostal's Balance Sheet?

We can see from the most recent balance sheet that Polimex-Mostostal had liabilities of zł1.26b falling due within a year, and liabilities of zł224.7m due beyond that. Offsetting these obligations, it had cash of zł671.4m as well as receivables valued at zł652.6m due within 12 months. So it has liabilities totalling zł161.1m more than its cash and near-term receivables, combined.

Since publicly traded Polimex-Mostostal shares are worth a total of zł842.4m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Polimex-Mostostal boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Polimex-Mostostal grew its EBIT by 57% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Polimex-Mostostal's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Polimex-Mostostal has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Polimex-Mostostal actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Polimex-Mostostal does have more liabilities than liquid assets, it also has net cash of zł488.6m. The cherry on top was that in converted 231% of that EBIT to free cash flow, bringing in zł464m. So is Polimex-Mostostal's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Polimex-Mostostal that you should be aware of before investing here.

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.

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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.