Is Fabryka Obrabiarek RAFAMET (WSE:RAF) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Fabryka Obrabiarek RAFAMET S.A. (WSE:RAF) does use debt in its business. But is this debt a concern to shareholders?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Fabryka Obrabiarek RAFAMET Carry?

The image below, which you can click on for greater detail, shows that at March 2025 Fabryka Obrabiarek RAFAMET had debt of zł46.8m, up from zł44.3m in one year. On the flip side, it has zł2.62m in cash leading to net debt of about zł44.2m.

How Strong Is Fabryka Obrabiarek RAFAMET's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fabryka Obrabiarek RAFAMET had liabilities of zł123.4m due within 12 months and liabilities of zł38.9m due beyond that. Offsetting this, it had zł2.62m in cash and zł87.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł71.9m.

Fabryka Obrabiarek RAFAMET has a market capitalization of zł339.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Fabryka Obrabiarek RAFAMET will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

See our latest analysis for Fabryka Obrabiarek RAFAMET

In the last year Fabryka Obrabiarek RAFAMET had a loss before interest and tax, and actually shrunk its revenue by 38%, to zł73m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Fabryka Obrabiarek RAFAMET's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable zł45m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of zł48m. So to be blunt we do think it is risky. 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 instance, we've identified 3 warning signs for Fabryka Obrabiarek RAFAMET (2 are potentially serious) you should be aware of.

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.