Does Trakcja (WSE:TRK) Have A Healthy Balance Sheet?

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 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 S.A. (WSE:TRK) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Trakcja

What Is Trakcja's Net Debt?

As you can see below, Trakcja had zł135.2m of debt at December 2023, down from zł264.8m a year prior. But on the other hand it also has zł384.9m in cash, leading to a zł249.7m net cash position.

How Healthy Is Trakcja's Balance Sheet?

According to the last reported balance sheet, Trakcja had liabilities of zł1.15b due within 12 months, and liabilities of zł85.9m due beyond 12 months. On the other hand, it had cash of zł384.9m and zł409.8m worth of receivables due within a year. So its liabilities total zł445.7m more than the combination of its cash and short-term receivables.

Trakcja has a market capitalization of zł881.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Trakcja boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Trakcja improved its EBIT from a last year's loss to a positive zł83m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Trakcja's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Trakcja 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 year, Trakcja actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Trakcja does have more liabilities than liquid assets, it also has net cash of zł249.7m. And it impressed us with free cash flow of zł453m, being 545% of its EBIT. So we are not troubled with Trakcja's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Trakcja , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.