Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Mex Polska S.A. (WSE:MEX) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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.
See our latest analysis for Mex Polska
What Is Mex Polska's Net Debt?
As you can see below, Mex Polska had zł13.3m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have zł6.95m in cash offsetting this, leading to net debt of about zł6.31m.
How Strong Is Mex Polska's Balance Sheet?
According to the last reported balance sheet, Mex Polska had liabilities of zł23.1m due within 12 months, and liabilities of zł32.3m due beyond 12 months. Offsetting this, it had zł6.95m in cash and zł1.98m in receivables that were due within 12 months. So it has liabilities totalling zł46.4m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the zł21.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Mex Polska would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Mex Polska 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.
In the last year Mex Polska had a loss before interest and tax, and actually shrunk its revenue by 50%, to zł31m. To be frank that doesn't bode well.
Caveat Emptor
While Mex Polska's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable zł7.7m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of zł5.5m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Mex Polska (of which 3 shouldn't be ignored!) 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.
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About WSE:MEX
Mex Polska
Develops, owns, operates, manages, and franchises restaurants primarily in Poland.
Good value with adequate balance sheet.
