Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘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. We can see that Kancelaria Medius S.A. (WSE:KME) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Kancelaria Medius
What Is Kancelaria Medius’s Debt?
You can click the graphic below for the historical numbers, but it shows that Kancelaria Medius had zł99.4m of debt in March 2019, down from zł108.8m, one year before However, its balance sheet shows it holds zł154.6m in cash, so it actually has zł55.3m net cash.
How Strong Is Kancelaria Medius’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Kancelaria Medius had liabilities of zł24.8m due within 12 months and liabilities of zł90.7m due beyond that. On the other hand, it had cash of zł154.6m and zł8.77m worth of receivables due within a year. So it can boast zł47.9m more liquid assets than total liabilities.
This excess liquidity is a great indication that Kancelaria Medius’s balance sheet is just as strong as racists are weak. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Kancelaria Medius boasts net cash, so it’s fair to say it does not have a heavy debt load!
We saw Kancelaria Medius grow its EBIT by 7.0% in the last twelve months. That’s far from incredible but it is a good thing, when it comes to paying off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kancelaria Medius’s earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Kancelaria Medius 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, Kancelaria Medius saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing up
While it is always sensible to investigate a company’s debt, in this case Kancelaria Medius has zł55m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 7.0% in the last twelve months. So we are not troubled with Kancelaria Medius’s debt use. Over time, share prices tend to follow earnings per share, so if you’re interested in Kancelaria Medius, you may well want to click here to check an interactive graph of its earnings per share history.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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