Is Gielda Praw Majatkowych Vindexus Spolka Akcyjna (WSE:VIN) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Gielda Praw Majatkowych Vindexus Spolka Akcyjna (WSE:VIN) does use debt in its business. 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. 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.

Check out our latest analysis for Gielda Praw Majatkowych Vindexus Spolka Akcyjna

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

As you can see below, Gielda Praw Majatkowych Vindexus Spolka Akcyjna had zł88.8m of debt at September 2020, down from zł93.6m a year prior. However, because it has a cash reserve of zł29.1m, its net debt is less, at about zł59.7m.

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 zł27.5m falling due within a year, and liabilities of zł73.0m due beyond that. Offsetting this, it had zł29.1m in cash and zł9.32m in receivables that were due within 12 months. So its liabilities total zł62.0m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's zł55.2m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While Gielda Praw Majatkowych Vindexus Spolka Akcyjna's debt to EBITDA ratio (4.5) suggests that it uses some debt, its interest cover is very weak, at 2.1, suggesting high leverage. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. Worse, Gielda Praw Majatkowych Vindexus Spolka Akcyjna's EBIT was down 49% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Gielda Praw Majatkowych Vindexus Spolka Akcyjna'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, Gielda Praw Majatkowych Vindexus Spolka Akcyjna recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

On the face of it, Gielda Praw Majatkowych Vindexus Spolka Akcyjna's interest cover left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability to convert EBIT to free cash flow isn't such a worry. Taking into account all the aforementioned factors, it looks like Gielda Praw Majatkowych Vindexus Spolka Akcyjna has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with Gielda Praw Majatkowych Vindexus Spolka Akcyjna (including 2 which is make us uncomfortable) .

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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