Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Centrum Finansowe S.A. (WSE:CFS) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Centrum Finansowe's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 Centrum Finansowe had zł18.7m of debt, an increase on zł12.0m, over one year. But it also has zł21.5m in cash to offset that, meaning it has zł2.77m net cash.
A Look At Centrum Finansowe's Liabilities
According to the last reported balance sheet, Centrum Finansowe had liabilities of zł3.07m due within 12 months, and liabilities of zł21.3m due beyond 12 months. Offsetting these obligations, it had cash of zł21.5m as well as receivables valued at zł387.7k due within 12 months. So its liabilities total zł2.54m more than the combination of its cash and short-term receivables.
Since publicly traded Centrum Finansowe shares are worth a total of zł43.1m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Centrum Finansowe also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Centrum Finansowe has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Centrum Finansowe 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Centrum Finansowe 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. Happily for any shareholders, Centrum Finansowe actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
We could understand if investors are concerned about Centrum Finansowe's liabilities, but we can be reassured by the fact it has has net cash of zł2.77m. And it impressed us with free cash flow of zł13m, being 198% of its EBIT. So is Centrum Finansowe's debt a risk? It doesn't seem so to us. 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. For example - Centrum Finansowe has 5 warning signs we think you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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