We Think Orlen (WSE:PKN) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Orlen S.A. (WSE:PKN) 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Orlen

How Much Debt Does Orlen Carry?

You can click the graphic below for the historical numbers, but it shows that Orlen had zł12.4b of debt in September 2023, down from zł16.4b, one year before. But it also has zł14.6b in cash to offset that, meaning it has zł2.21b net cash.

A Look At Orlen's Liabilities

We can see from the most recent balance sheet that Orlen had liabilities of zł64.6b falling due within a year, and liabilities of zł38.9b due beyond that. On the other hand, it had cash of zł14.6b and zł36.7b worth of receivables due within a year. So it has liabilities totalling zł52.2b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its very significant market capitalization of zł78.8b, so it does suggest shareholders should keep an eye on Orlen's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Orlen boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Orlen has boosted its EBIT by 49%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Orlen can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Orlen has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Orlen's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Orlen does have more liabilities than liquid assets, it also has net cash of zł2.21b. And it impressed us with its EBIT growth of 49% over the last year. So we don't have any problem with Orlen's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Orlen (1 is concerning) 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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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.