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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Centrum Finansowe S.A. (WSE:CFS) does carry debt. 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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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

What Is Centrum Finansowe's Net Debt?

The image below, which you can click on for greater detail, shows that Centrum Finansowe had debt of zł6.98m at the end of September 2022, a reduction from zł8.84m over a year. However, it does have zł14.1m in cash offsetting this, leading to net cash of zł7.10m.

A Look At Centrum Finansowe's Liabilities

Zooming in on the latest balance sheet data, we can see that Centrum Finansowe had liabilities of zł3.75m due within 12 months and liabilities of zł15.9m due beyond that. Offsetting these obligations, it had cash of zł14.1m as well as receivables valued at zł2.38m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł3.14m.

Given Centrum Finansowe has a market capitalization of zł42.0m, it's hard to believe these liabilities pose much threat. 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!

The good news is that Centrum Finansowe has increased its EBIT by 3.6% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. 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. 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.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Centrum Finansowe has zł7.10m in net cash. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in zł15m. So we don't think Centrum Finansowe's use of debt is 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. For example, we've discovered 5 warning signs for Centrum Finansowe (2 are a bit concerning!) that you should be aware of before investing here.

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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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.