We Think Tamex Obiekty Sportowe (WSE:TOS) Can Manage Its Debt With Ease

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.' 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. We can see that Tamex Obiekty Sportowe S.A. (WSE:TOS) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Tamex Obiekty Sportowe

How Much Debt Does Tamex Obiekty Sportowe Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Tamex Obiekty Sportowe had zł5.58m of debt, an increase on none, over one year. However, it does have zł570.9k in cash offsetting this, leading to net debt of about zł5.01m.

How Strong Is Tamex Obiekty Sportowe's Balance Sheet?

According to the last reported balance sheet, Tamex Obiekty Sportowe had liabilities of zł16.7m due within 12 months, and liabilities of zł7.59m due beyond 12 months. Offsetting these obligations, it had cash of zł570.9k as well as receivables valued at zł28.7m due within 12 months. So it can boast zł5.02m more liquid assets than total liabilities.

This excess liquidity is a great indication that Tamex Obiekty Sportowe's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Tamex Obiekty Sportowe has net debt worth 2.1 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 5.1 times the interest expense. While these numbers do not alarm us, it's worth noting that the cost of the company's debt is having a real impact. We saw Tamex Obiekty Sportowe grow its EBIT by 8.0% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. 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 Tamex Obiekty Sportowe 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, Tamex Obiekty Sportowe actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Happily, Tamex Obiekty Sportowe's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. And the good news does not stop there, as its level of total liabilities also supports that impression! Overall, we don't think Tamex Obiekty Sportowe is taking any bad risks, as its debt load seems modest. So we're not worried about the use of a little leverage on the balance sheet. 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. Be aware that Tamex Obiekty Sportowe is showing 4 warning signs in our investment analysis , and 2 of those are a bit concerning...

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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