Polimex-Mostostal (WSE:PXM) Seems To Use Debt Rather Sparingly

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Polimex-Mostostal S.A. (WSE:PXM) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Polimex-Mostostal

What Is Polimex-Mostostal's Debt?

The image below, which you can click on for greater detail, shows that Polimex-Mostostal had debt of zł198.0m at the end of March 2021, a reduction from zł360.2m over a year. But on the other hand it also has zł435.4m in cash, leading to a zł237.4m net cash position.

A Look At Polimex-Mostostal's Liabilities

The latest balance sheet data shows that Polimex-Mostostal had liabilities of zł1.12b due within a year, and liabilities of zł218.5m falling due after that. On the other hand, it had cash of zł435.4m and zł764.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł141.3m.

Since publicly traded Polimex-Mostostal shares are worth a total of zł1.14b, 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. While it does have liabilities worth noting, Polimex-Mostostal also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Polimex-Mostostal grew its EBIT by 135% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Polimex-Mostostal'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. 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 two years, Polimex-Mostostal actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Polimex-Mostostal does have more liabilities than liquid assets, it also has net cash of zł237.4m. And it impressed us with free cash flow of zł249m, being 216% of its EBIT. So we don't think Polimex-Mostostal's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Polimex-Mostostal .

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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