Trakcja PRKiI (WSE:TRK) Has Debt But No Earnings; Should You Worry?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Trakcja PRKiI S.A. (WSE:TRK) does use debt in its business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Trakcja PRKiI

How Much Debt Does Trakcja PRKiI Carry?

The image below, which you can click on for greater detail, shows that Trakcja PRKiI had debt of zł359.3m at the end of March 2021, a reduction from zł435.5m over a year. However, because it has a cash reserve of zł77.8m, its net debt is less, at about zł281.5m.

How Strong Is Trakcja PRKiI's Balance Sheet?

The latest balance sheet data shows that Trakcja PRKiI had liabilities of zł751.0m due within a year, and liabilities of zł293.0m falling due after that. Offsetting these obligations, it had cash of zł77.8m as well as receivables valued at zł565.3m due within 12 months. So its liabilities total zł401.0m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the zł164.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Trakcja PRKiI would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Trakcja PRKiI 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.

Over 12 months, Trakcja PRKiI made a loss at the EBIT level, and saw its revenue drop to zł1.3b, which is a fall of 8.5%. That's not what we would hope to see.

Caveat Emptor

Importantly, Trakcja PRKiI had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable zł50m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident 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 zł104m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Trakcja PRKiI (of which 1 doesn't sit too well with us!) you should know about.

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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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.
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