Gielda Praw Majatkowych Vindexus Spolka Akcyjna (WSE:VIN) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Gielda Praw Majatkowych Vindexus Spolka Akcyjna (WSE:VIN) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Gielda Praw Majatkowych Vindexus Spolka Akcyjna

What Is Gielda Praw Majatkowych Vindexus Spolka Akcyjna's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Gielda Praw Majatkowych Vindexus Spolka Akcyjna had debt of zł87.5m, up from zł63.0m in one year. However, because it has a cash reserve of zł86.0m, its net debt is less, at about zł1.55m.

How Strong Is Gielda Praw Majatkowych Vindexus Spolka Akcyjna's Balance Sheet?

The latest balance sheet data shows that Gielda Praw Majatkowych Vindexus Spolka Akcyjna had liabilities of zł51.6m due within a year, and liabilities of zł66.0m falling due after that. On the other hand, it had cash of zł86.0m and zł28.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł2.81m.

Given Gielda Praw Majatkowych Vindexus Spolka Akcyjna has a market capitalization of zł95.2m, 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Gielda Praw Majatkowych Vindexus Spolka Akcyjna's net debt to EBITDA ratio is very low, at 0.072, suggesting the debt is only trivial. Although with EBIT only covering interest expenses 2.9 times over, the company is truly paying for borrowing. Shareholders should be aware that Gielda Praw Majatkowych Vindexus Spolka Akcyjna's EBIT was down 57% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Gielda Praw Majatkowych Vindexus Spolka Akcyjna can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, Gielda Praw Majatkowych Vindexus Spolka Akcyjna recorded free cash flow worth 59% 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.

Our View

Based on what we've seen Gielda Praw Majatkowych Vindexus Spolka Akcyjna is not finding it easy, given its EBIT growth rate, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to handle its debt, based on its EBITDA, is pretty flash. When we consider all the factors mentioned above, we do feel a bit cautious about Gielda Praw Majatkowych Vindexus Spolka Akcyjna's use of debt. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Gielda Praw Majatkowych Vindexus Spolka Akcyjna that you should be aware of.

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.