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. 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?
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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Gielda Praw Majatkowych Vindexus Spolka Akcyjna Carry?
The image below, which you can click on for greater detail, shows that Gielda Praw Majatkowych Vindexus Spolka Akcyjna had debt of zł89.2m at the end of March 2021, a reduction from zł100.9m over a year. However, because it has a cash reserve of zł44.6m, its net debt is less, at about zł44.6m.
How Strong Is Gielda Praw Majatkowych Vindexus Spolka Akcyjna's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Gielda Praw Majatkowych Vindexus Spolka Akcyjna had liabilities of zł43.9m due within 12 months and liabilities of zł59.7m due beyond that. On the other hand, it had cash of zł44.6m and zł9.92m worth of receivables due within a year. So it has liabilities totalling zł49.1m more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of zł80.9m, so it does suggest shareholders should keep an eye on Gielda Praw Majatkowych Vindexus Spolka Akcyjna's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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's net debt is sitting at a very reasonable 1.9 times its EBITDA, while its EBIT covered its interest expense just 4.3 times last year. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. It is well worth noting that Gielda Praw Majatkowych Vindexus Spolka Akcyjna's EBIT shot up like bamboo after rain, gaining 35% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Gielda Praw Majatkowych Vindexus Spolka Akcyjna 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. 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.
When it comes to the balance sheet, the standout positive for Gielda Praw Majatkowych Vindexus Spolka Akcyjna was the fact that it seems able to grow its EBIT confidently. But the other factors we noted above weren't so encouraging. For instance it seems like it has to struggle a bit to handle its total liabilities. Considering this range of data points, we think Gielda Praw Majatkowych Vindexus Spolka Akcyjna is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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 (1 doesn't sit too well with us) you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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