Health Check: How Prudently Does Fabryka Obrabiarek RAFAMET (WSE:RAF) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Fabryka Obrabiarek RAFAMET S.A. (WSE:RAF) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Fabryka Obrabiarek RAFAMET

How Much Debt Does Fabryka Obrabiarek RAFAMET Carry?

You can click the graphic below for the historical numbers, but it shows that Fabryka Obrabiarek RAFAMET had zł44.3m of debt in September 2024, down from zł47.6m, one year before. However, it does have zł5.55m in cash offsetting this, leading to net debt of about zł38.8m.

A Look At Fabryka Obrabiarek RAFAMET's Liabilities

Zooming in on the latest balance sheet data, we can see that Fabryka Obrabiarek RAFAMET had liabilities of zł124.9m due within 12 months and liabilities of zł42.2m due beyond that. On the other hand, it had cash of zł5.55m and zł101.9m worth of receivables due within a year. So it has liabilities totalling zł59.6m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's zł51.7m 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. There's no doubt that we learn most about debt from the balance sheet. But it is Fabryka Obrabiarek RAFAMET'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.

In the last year Fabryka Obrabiarek RAFAMET had a loss before interest and tax, and actually shrunk its revenue by 31%, to zł89m. That makes us nervous, to say the least.

Caveat Emptor

While Fabryka Obrabiarek RAFAMET's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping zł24m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of zł24m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. We've identified 2 warning signs with Fabryka Obrabiarek RAFAMET (at least 1 which is concerning) , 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.