ORGANIC Farma Zdrowia (WSE:ORG) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, ORGANIC Farma Zdrowia S.A. (WSE:ORG) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for ORGANIC Farma Zdrowia

What Is ORGANIC Farma Zdrowia's Debt?

You can click the graphic below for the historical numbers, but it shows that ORGANIC Farma Zdrowia had zł8.01m of debt in September 2024, down from zł9.86m, one year before. However, it also had zł798.0k in cash, and so its net debt is zł7.22m.

How Strong Is ORGANIC Farma Zdrowia's Balance Sheet?

The latest balance sheet data shows that ORGANIC Farma Zdrowia had liabilities of zł16.6m due within a year, and liabilities of zł7.18m falling due after that. Offsetting this, it had zł798.0k in cash and zł7.29m in receivables that were due within 12 months. So its liabilities total zł15.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since ORGANIC Farma Zdrowia has a market capitalization of zł57.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With a debt to EBITDA ratio of 1.7, ORGANIC Farma Zdrowia uses debt artfully but responsibly. And the alluring interest cover (EBIT of 7.1 times interest expense) certainly does not do anything to dispel this impression. Although ORGANIC Farma Zdrowia made a loss at the EBIT level, last year, it was also good to see that it generated zł2.5m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is ORGANIC Farma Zdrowia's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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 the earnings before interest and tax (EBIT) is backed by free cash flow. Over the most recent year, ORGANIC Farma Zdrowia recorded free cash flow worth 75% 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

The good news is that ORGANIC Farma Zdrowia's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. And we also thought its interest cover was a positive. All these things considered, it appears that ORGANIC Farma Zdrowia can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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. We've identified 5 warning signs with ORGANIC Farma Zdrowia (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.