Does Lubelski Wegiel Bogdanka (WSE:LWB) Have A 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, Lubelski Wegiel Bogdanka S.A. (WSE:LWB) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Lubelski Wegiel Bogdanka

What Is Lubelski Wegiel Bogdanka's Debt?

The image below, which you can click on for greater detail, shows that Lubelski Wegiel Bogdanka had debt of zł8.71m at the end of September 2021, a reduction from zł11.8m over a year. However, it does have zł479.1m in cash offsetting this, leading to net cash of zł470.3m.

How Strong Is Lubelski Wegiel Bogdanka's Balance Sheet?

We can see from the most recent balance sheet that Lubelski Wegiel Bogdanka had liabilities of zł443.8m falling due within a year, and liabilities of zł666.1m due beyond that. Offsetting this, it had zł479.1m in cash and zł321.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł309.2m.

This deficit isn't so bad because Lubelski Wegiel Bogdanka is worth zł1.24b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Lubelski Wegiel Bogdanka also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Lubelski Wegiel Bogdanka grew its EBIT by 199% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lubelski Wegiel Bogdanka's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Lubelski Wegiel Bogdanka may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Lubelski Wegiel Bogdanka produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Lubelski Wegiel Bogdanka's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł470.3m. And we liked the look of last year's 199% year-on-year EBIT growth. So is Lubelski Wegiel Bogdanka's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Lubelski Wegiel Bogdanka has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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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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.