We Think Polimex-Mostostal (WSE:PXM) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Polimex-Mostostal S.A. (WSE:PXM) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Polimex-Mostostal

What Is Polimex-Mostostal's Net Debt?

As you can see below, Polimex-Mostostal had zł220.9m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has zł480.4m in cash, leading to a zł259.5m net cash position.

How Healthy Is Polimex-Mostostal's Balance Sheet?

According to the last reported balance sheet, Polimex-Mostostal had liabilities of zł1.11b due within 12 months, and liabilities of zł264.1m due beyond 12 months. Offsetting this, it had zł480.4m in cash and zł899.8m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Polimex-Mostostal's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the zł1.33b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Polimex-Mostostal has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Polimex-Mostostal grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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 company can only pay off debt with cold hard cash, not accounting profits. Polimex-Mostostal may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Polimex-Mostostal recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Polimex-Mostostal has zł259.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in -zł310m. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Polimex-Mostostal you should be aware of.

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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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.