Is Zaklady Przemyslu Cukierniczego Otmuchów (WSE:OTM) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Zaklady Przemyslu Cukierniczego Otmuchów S.A. (WSE:OTM) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Zaklady Przemyslu Cukierniczego Otmuchów

How Much Debt Does Zaklady Przemyslu Cukierniczego Otmuchów Carry?

The image below, which you can click on for greater detail, shows that Zaklady Przemyslu Cukierniczego Otmuchów had debt of zł24.9m at the end of September 2020, a reduction from zł28.5m over a year. However, because it has a cash reserve of zł6.05m, its net debt is less, at about zł18.9m.

How Healthy Is Zaklady Przemyslu Cukierniczego Otmuchów's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zaklady Przemyslu Cukierniczego Otmuchów had liabilities of zł60.3m due within 12 months and liabilities of zł18.2m due beyond that. Offsetting this, it had zł6.05m in cash and zł35.9m in receivables that were due within 12 months. So it has liabilities totalling zł36.5m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of zł43.1m, so it does suggest shareholders should keep an eye on Zaklady Przemyslu Cukierniczego Otmuchów's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Zaklady Przemyslu Cukierniczego Otmuchów 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 Zaklady Przemyslu Cukierniczego Otmuchów's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Zaklady Przemyslu Cukierniczego Otmuchów produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping zł14m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of zł12m into a profit. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Zaklady Przemyslu Cukierniczego Otmuchów (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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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