These 4 Measures Indicate That Centrum Finansowe (WSE:CFS) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Centrum Finansowe S.A. (WSE:CFS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Centrum Finansowe

How Much Debt Does Centrum Finansowe Carry?

As you can see below, Centrum Finansowe had zł8.84m of debt at September 2021, down from zł12.0m a year prior. However, its balance sheet shows it holds zł12.7m in cash, so it actually has zł3.84m net cash.

How Strong Is Centrum Finansowe's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Centrum Finansowe had liabilities of zł4.03m due within 12 months and liabilities of zł12.6m due beyond that. Offsetting these obligations, it had cash of zł12.7m as well as receivables valued at zł466.3k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł3.51m.

Since publicly traded Centrum Finansowe shares are worth a total of zł45.2m, 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 31%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Centrum Finansowe 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Centrum Finansowe has zł3.84m in net cash. And it impressed us with free cash flow of zł14m, being 138% of its EBIT. So is Centrum Finansowe's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Centrum Finansowe you should know about.

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.