Here's Why Cognor Holding (WSE:COG) Can Manage Its Debt Responsibly

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.' 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. As with many other companies Cognor Holding S.A. (WSE:COG) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cognor Holding

What Is Cognor Holding's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Cognor Holding had debt of zł280.8m, up from zł204.8m in one year. But on the other hand it also has zł292.1m in cash, leading to a zł11.3m net cash position.

How Healthy Is Cognor Holding's Balance Sheet?

We can see from the most recent balance sheet that Cognor Holding had liabilities of zł489.9m falling due within a year, and liabilities of zł353.8m due beyond that. On the other hand, it had cash of zł292.1m and zł361.0m worth of receivables due within a year. So its liabilities total zł190.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Cognor Holding has a market capitalization of zł754.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Cognor Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Cognor Holding grew its EBIT by 132% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Cognor Holding'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Cognor Holding 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. Looking at the most recent three years, Cognor Holding recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Cognor Holding does have more liabilities than liquid assets, it also has net cash of zł11.3m. And we liked the look of last year's 132% year-on-year EBIT growth. So we don't think Cognor Holding's use of debt is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Cognor Holding (including 1 which is a bit concerning) .

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.