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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Centrum Finansowe S.A. (WSE:CFS) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Centrum Finansowe Carry?
As you can see below, at the end of June 2022, Centrum Finansowe had zł13.8m of debt, up from zł8.84m a year ago. Click the image for more detail. But it also has zł15.8m in cash to offset that, meaning it has zł1.92m net cash.
A Look At Centrum Finansowe's Liabilities
We can see from the most recent balance sheet that Centrum Finansowe had liabilities of zł4.00m falling due within a year, and liabilities of zł15.8m due beyond that. On the other hand, it had cash of zł15.8m and zł1.08m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł2.96m.
Of course, Centrum Finansowe has a market capitalization of zł35.3m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Centrum Finansowe boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Centrum Finansowe saw its EBIT drop by 5.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Centrum Finansowe'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Centrum Finansowe has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Centrum Finansowe actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
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 zł1.92m. And it impressed us with free cash flow of zł13m, being 139% of its EBIT. So we don't think Centrum Finansowe's use of debt is risky. 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. To that end, you should learn about the 5 warning signs we've spotted with Centrum Finansowe (including 2 which are significant) .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
Centrum Finansowe S.A. provides debt collection services for individuals, debtors, and creditors.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
|Analysis Area||Score (0-6)|
Read more about these checks in the individual report sections or in our analysis model.
Excellent balance sheet established dividend payer.