Does Jastrzebska Spólka Weglowa (WSE:JSW) Have A Healthy Balance Sheet?

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.' 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, Jastrzebska Spólka Weglowa S.A. (WSE:JSW) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jastrzebska Spólka Weglowa

What Is Jastrzebska Spólka Weglowa's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Jastrzebska Spólka Weglowa had zł1.59b of debt in March 2022, down from zł2.03b, one year before. However, it does have zł2.73b in cash offsetting this, leading to net cash of zł1.14b.

How Strong Is Jastrzebska Spólka Weglowa's Balance Sheet?

According to the last reported balance sheet, Jastrzebska Spólka Weglowa had liabilities of zł4.24b due within 12 months, and liabilities of zł3.35b due beyond 12 months. Offsetting these obligations, it had cash of zł2.73b as well as receivables valued at zł2.23b due within 12 months. So its liabilities total zł2.62b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Jastrzebska Spólka Weglowa is worth zł7.91b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Jastrzebska Spólka Weglowa boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Jastrzebska Spólka Weglowa turned things around in the last 12 months, delivering and EBIT of zł4.1b. 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 Jastrzebska Spólka Weglowa'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jastrzebska Spólka Weglowa 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. During the last year, Jastrzebska Spólka Weglowa produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Jastrzebska Spólka Weglowa's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł1.14b. So we don't have any problem with Jastrzebska Spólka Weglowa's use of debt. 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. We've identified 1 warning sign with Jastrzebska Spólka Weglowa , and understanding them should be part of your investment process.

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.