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

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. Importantly, Centrum Finansowe S.A. (WSE:CFS) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Centrum Finansowe

What Is Centrum Finansowe's Debt?

As you can see below, at the end of December 2022, Centrum Finansowe had zł12.2m of debt, up from zł10.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds zł16.2m in cash, so it actually has zł4.03m net cash.

How Healthy Is Centrum Finansowe's Balance Sheet?

We can see from the most recent balance sheet that Centrum Finansowe had liabilities of zł7.47m falling due within a year, and liabilities of zł12.4m due beyond that. On the other hand, it had cash of zł16.2m and zł1.29m worth of receivables due within a year. So it has liabilities totalling zł2.43m more than its cash and near-term receivables, combined.

Given Centrum Finansowe has a market capitalization of zł41.4m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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. 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. 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. 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

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 zł4.03m. The cherry on top was that in converted 134% of that EBIT to free cash flow, bringing in zł16m. 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. Case in point: We've spotted 3 warning signs for Centrum Finansowe you should be aware of.

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.