Is Jastrzebska Spólka Weglowa (WSE:JSW) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Jastrzebska Spólka Weglowa S.A. (WSE:JSW) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jastrzebska Spólka Weglowa

What Is Jastrzebska Spólka Weglowa's Debt?

As you can see below, at the end of December 2022, Jastrzebska Spólka Weglowa had zł3.37b of debt, up from zł2.05b a year ago. Click the image for more detail. However, it does have zł4.84b in cash offsetting this, leading to net cash of zł1.47b.

A Look At Jastrzebska Spólka Weglowa's Liabilities

Zooming in on the latest balance sheet data, we can see that Jastrzebska Spólka Weglowa had liabilities of zł7.73b due within 12 months and liabilities of zł3.29b due beyond that. Offsetting these obligations, it had cash of zł4.84b as well as receivables valued at zł1.97b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł4.22b.

This is a mountain of leverage relative to its market capitalization of zł5.55b. 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.

Even more impressive was the fact that Jastrzebska Spólka Weglowa grew its EBIT by 509% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Over the most recent two years, Jastrzebska Spólka Weglowa recorded free cash flow worth 77% 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

While Jastrzebska Spólka Weglowa does have more liabilities than liquid assets, it also has net cash of zł1.47b. And we liked the look of last year's 509% year-on-year EBIT growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Jastrzebska Spólka Weglowa you should know about.

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.