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.' 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. Importantly, Mo-BRUK S.A. (WSE:MBR) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Mo-BRUK's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Mo-BRUK had zł6.55m of debt in September 2020, down from zł15.1m, one year before. But on the other hand it also has zł24.9m in cash, leading to a zł18.3m net cash position.
How Healthy Is Mo-BRUK's Balance Sheet?
According to the last reported balance sheet, Mo-BRUK had liabilities of zł20.3m due within 12 months, and liabilities of zł28.1m due beyond 12 months. On the other hand, it had cash of zł24.9m and zł36.7m worth of receivables due within a year. So it actually has zł13.2m more liquid assets than total liabilities.
Having regard to Mo-BRUK's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the zł1.16b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Mo-BRUK boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Mo-BRUK grew its EBIT by 106% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Mo-BRUK will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Mo-BRUK 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 most recent three years, Mo-BRUK recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While we empathize with investors who find debt concerning, you should keep in mind that Mo-BRUK has net cash of zł18.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 106% over the last year. So we don't think Mo-BRUK's use of debt is risky. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Mo-BRUK you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. 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.
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