Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Zaklady Urzadzen Kotlowych Staporków S.A. (WSE:ZUK) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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 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. 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.
What Is Zaklady Urzadzen Kotlowych Staporków's Net Debt?
The image below, which you can click on for greater detail, shows that Zaklady Urzadzen Kotlowych Staporków had debt of zł14.4m at the end of June 2021, a reduction from zł16.5m over a year. However, it does have zł4.08m in cash offsetting this, leading to net debt of about zł10.3m.
How Healthy Is Zaklady Urzadzen Kotlowych Staporków's Balance Sheet?
According to the last reported balance sheet, Zaklady Urzadzen Kotlowych Staporków had liabilities of zł22.2m due within 12 months, and liabilities of zł7.37m due beyond 12 months. On the other hand, it had cash of zł4.08m and zł9.00m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł16.5m.
This is a mountain of leverage relative to its market capitalization of zł22.4m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zaklady Urzadzen Kotlowych Staporków will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Zaklady Urzadzen Kotlowych Staporków made a loss at the EBIT level, and saw its revenue drop to zł44m, which is a fall of 15%. That's not what we would hope to see.
While Zaklady Urzadzen Kotlowych Staporków's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at zł109k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled zł663k in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Zaklady Urzadzen Kotlowych Staporków is showing 4 warning signs in our investment analysis , and 2 of those make us uncomfortable...
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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