Is Trakcja (WSE:TRK) A Risky Investment?

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 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 note that Trakcja S.A. (WSE:TRK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

What Is Trakcja's Net Debt?

As you can see below, at the end of March 2022, Trakcja had zł458.2m of debt, up from zł359.3m a year ago. Click the image for more detail. However, it does have zł71.5m in cash offsetting this, leading to net debt of about zł386.6m.

How Strong Is Trakcja's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Trakcja had liabilities of zł668.9m due within 12 months and liabilities of zł343.6m due beyond that. Offsetting these obligations, it had cash of zł71.5m as well as receivables valued at zł517.2m due within 12 months. So its liabilities total zł423.8m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of zł539.7m, so it does suggest shareholders should keep an eye on Trakcja's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Trakcja wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to zł1.5b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Trakcja produced an earnings before interest and tax (EBIT) loss. Indeed, it lost zł18m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through zł92m of cash over the last year. So suffice it to say we consider the stock very risky. 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. To that end, you should be aware of the 3 warning signs we've spotted with Trakcja .

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.