Here's Why Gielda Praw Majatkowych Vindexus Spolka Akcyjna (WSE:VIN) Can Manage Its Debt Responsibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Gielda Praw Majatkowych Vindexus Spolka Akcyjna (WSE:VIN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Gielda Praw Majatkowych Vindexus Spolka Akcyjna

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

You can click the graphic below for the historical numbers, but it shows that Gielda Praw Majatkowych Vindexus Spolka Akcyjna had zł61.5m of debt in September 2023, down from zł78.4m, one year before. However, because it has a cash reserve of zł54.7m, its net debt is less, at about zł6.86m.

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

We can see from the most recent balance sheet that Gielda Praw Majatkowych Vindexus Spolka Akcyjna had liabilities of zł35.1m falling due within a year, and liabilities of zł50.2m due beyond that. Offsetting these obligations, it had cash of zł54.7m as well as receivables valued at zł11.2m due within 12 months. So it has liabilities totalling zł19.4m more than its cash and near-term receivables, combined.

Given Gielda Praw Majatkowych Vindexus Spolka Akcyjna has a market capitalization of zł143.9m, 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.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Looking at its net debt to EBITDA of 0.14 and interest cover of 6.2 times, it seems to us that Gielda Praw Majatkowych Vindexus Spolka Akcyjna is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. It is just as well that Gielda Praw Majatkowych Vindexus Spolka Akcyjna's load is not too heavy, because its EBIT was down 22% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Gielda Praw Majatkowych Vindexus Spolka Akcyjna recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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. In particular, we are dazzled with its net debt to EBITDA. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Gielda Praw Majatkowych Vindexus Spolka Akcyjna is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.