These 4 Measures Indicate That Polski Koncern Naftowy ORLEN Spólka Akcyjna (WSE:PKN) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Polski Koncern Naftowy ORLEN Spólka Akcyjna (WSE:PKN) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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.

Check out our latest analysis for Polski Koncern Naftowy ORLEN Spólka Akcyjna

What Is Polski Koncern Naftowy ORLEN Spólka Akcyjna's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Polski Koncern Naftowy ORLEN Spólka Akcyjna had zł19.2b of debt, an increase on zł15.2b, over one year. But on the other hand it also has zł21.9b in cash, leading to a zł2.69b net cash position.

How Healthy Is Polski Koncern Naftowy ORLEN Spólka Akcyjna's Balance Sheet?

We can see from the most recent balance sheet that Polski Koncern Naftowy ORLEN Spólka Akcyjna had liabilities of zł92.1b falling due within a year, and liabilities of zł41.8b due beyond that. Offsetting this, it had zł21.9b in cash and zł38.0b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł74.0b.

When you consider that this deficiency exceeds the company's huge zł68.0b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Polski Koncern Naftowy ORLEN Spólka Akcyjna boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Even more impressive was the fact that Polski Koncern Naftowy ORLEN Spólka Akcyjna grew its EBIT by 151% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Polski Koncern Naftowy ORLEN Spólka Akcyjna'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. Polski Koncern Naftowy ORLEN Spólka Akcyjna 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. Looking at the most recent two years, Polski Koncern Naftowy ORLEN Spólka Akcyjna recorded free cash flow of 32% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Polski Koncern Naftowy ORLEN Spólka Akcyjna does have more liabilities than liquid assets, it also has net cash of zł2.69b. And we liked the look of last year's 151% year-on-year EBIT growth. So we are not troubled with Polski Koncern Naftowy ORLEN Spólka Akcyjna's debt use. 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. Case in point: We've spotted 4 warning signs for Polski Koncern Naftowy ORLEN Spólka Akcyjna you should be aware of, and 3 of them are a bit unpleasant.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.