IZOBLOK (WSE:IZB) Is Carrying A Fair Bit Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, IZOBLOK S.A. (WSE:IZB) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for IZOBLOK

What Is IZOBLOK's Net Debt?

As you can see below, IZOBLOK had zł48.4m of debt, at October 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had zł8.75m in cash, and so its net debt is zł39.6m.

How Strong Is IZOBLOK's Balance Sheet?

According to the last reported balance sheet, IZOBLOK had liabilities of zł44.4m due within 12 months, and liabilities of zł53.7m due beyond 12 months. Offsetting this, it had zł8.75m in cash and zł45.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł44.0m.

This deficit is considerable relative to its market capitalization of zł53.7m, so it does suggest shareholders should keep an eye on IZOBLOK'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 IZOBLOK 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.

Over 12 months, IZOBLOK made a loss at the EBIT level, and saw its revenue drop to zł166m, which is a fall of 21%. To be frank that doesn't bode well.

Caveat Emptor

Not only did IZOBLOK's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping zł12m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 zł13m into a profit. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with IZOBLOK (including 1 which is significant) .

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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