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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Cognor Holding S.A. (WSE:COG) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Cognor Holding

How Much Debt Does Cognor Holding Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Cognor Holding had zł375.9m of debt, an increase on zł306.9m, over one year. But on the other hand it also has zł415.4m in cash, leading to a zł39.4m net cash position.

A Look At Cognor Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Cognor Holding had liabilities of zł640.1m due within 12 months and liabilities of zł444.4m due beyond that. Offsetting this, it had zł415.4m in cash and zł545.2m in receivables that were due within 12 months. So its liabilities total zł123.9m more than the combination of its cash and short-term receivables.

Of course, Cognor Holding has a market capitalization of zł1.41b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Cognor Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Cognor Holding has increased its EBIT by 8.4% over twelve months, which should ease any concerns about debt repayment. 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 Cognor Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Cognor Holding 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 three years, Cognor Holding recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Cognor Holding has zł39.4m in net cash. On top of that, it increased its EBIT by 8.4% in the last twelve months. So we are not troubled with Cognor Holding's debt use. 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. Case in point: We've spotted 4 warning signs for Cognor Holding you should be aware of, and 3 of them can'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.

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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.