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

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.' 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. As with many other companies Gielda Praw Majatkowych Vindexus Spolka Akcyjna (WSE:VIN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out the opportunities and risks within the PL Commercial Services industry.

How Much Debt Does Gielda Praw Majatkowych Vindexus Spolka Akcyjna Carry?

As you can see below, Gielda Praw Majatkowych Vindexus Spolka Akcyjna had zł86.2m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has zł66.6m in cash leading to net debt of about zł19.6m.

A Look At Gielda Praw Majatkowych Vindexus Spolka Akcyjna's Liabilities

Zooming in on the latest balance sheet data, we can see that Gielda Praw Majatkowych Vindexus Spolka Akcyjna had liabilities of zł44.0m due within 12 months and liabilities of zł73.4m due beyond that. On the other hand, it had cash of zł66.6m and zł24.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł26.7m.

While this might seem like a lot, it is not so bad since Gielda Praw Majatkowych Vindexus Spolka Akcyjna has a market capitalization of zł77.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

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). 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).

Gielda Praw Majatkowych Vindexus Spolka Akcyjna has net debt of just 0.29 times EBITDA, indicating that it is certainly not a reckless borrower. And this view is supported by the solid interest coverage, with EBIT coming in at 8.5 times the interest expense over the last year. Better yet, Gielda Praw Majatkowych Vindexus Spolka Akcyjna grew its EBIT by 123% last year, which is an impressive improvement. 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 Gielda Praw Majatkowych Vindexus Spolka Akcyjna will need earnings to service that debt. 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. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Gielda Praw Majatkowych Vindexus Spolka Akcyjna generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

Happily, Gielda Praw Majatkowych Vindexus Spolka Akcyjna's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. Looking at the bigger picture, we think Gielda Praw Majatkowych Vindexus Spolka Akcyjna's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Gielda Praw Majatkowych Vindexus Spolka Akcyjna you should be aware of.

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. 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.