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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Browar Czarnków S.A. (WSE:BRO) does carry debt. But should shareholders be worried about its use of debt?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
What Is Browar Czarnków's Net Debt?
The image below, which you can click on for greater detail, shows that Browar Czarnków had debt of zł16.6m at the end of September 2021, a reduction from zł22.5m over a year. Net debt is about the same, since the it doesn't have much cash.
How Healthy Is Browar Czarnków's Balance Sheet?
We can see from the most recent balance sheet that Browar Czarnków had liabilities of zł23.1m falling due within a year, and liabilities of zł192.2k due beyond that. Offsetting these obligations, it had cash of zł172.5k as well as receivables valued at zł606.1k due within 12 months. So its liabilities total zł22.5m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of zł28.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Browar Czarnków'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.
Over 12 months, Browar Czarnków made a loss at the EBIT level, and saw its revenue drop to zł6.2m, which is a fall of 12%. We would much prefer see growth.
While Browar Czarnków's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping zł3.3m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled zł661k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Browar Czarnków is showing 6 warning signs in our investment analysis , and 4 of those shouldn't be ignored...
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.
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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