Here's Why Jastrzebska Spólka Weglowa (WSE:JSW) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Jastrzebska Spólka Weglowa S.A. (WSE:JSW) makes use of 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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Jastrzebska Spólka Weglowa

How Much Debt Does Jastrzebska Spólka Weglowa Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Jastrzebska Spólka Weglowa had zł3.08b of debt, an increase on zł1.59b, over one year. However, it does have zł5.52b in cash offsetting this, leading to net cash of zł2.44b.

How Strong Is Jastrzebska Spólka Weglowa's Balance Sheet?

According to the last reported balance sheet, Jastrzebska Spólka Weglowa had liabilities of zł7.58b due within 12 months, and liabilities of zł3.21b due beyond 12 months. Offsetting this, it had zł5.52b in cash and zł2.10b in receivables that were due within 12 months. So it has liabilities totalling zł3.18b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of zł4.89b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Jastrzebska Spólka Weglowa also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Jastrzebska Spólka Weglowa grew its EBIT by 110% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jastrzebska Spólka Weglowa 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, a company can only pay off debt with cold hard cash, not accounting profits. Jastrzebska Spólka Weglowa 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. Over the most recent two years, Jastrzebska Spólka Weglowa recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 zł2.44b. And it impressed us with its EBIT growth of 110% over the last year. So we don't think Jastrzebska Spólka Weglowa's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Jastrzebska Spólka Weglowa has 1 warning sign we think you should be aware of.

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. 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.