Jastrzebska Spólka Weglowa (WSE:JSW) Has A Pretty 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.' 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. We can see that Jastrzebska Spólka Weglowa S.A. (WSE:JSW) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jastrzebska Spólka Weglowa

What Is Jastrzebska Spólka Weglowa's Debt?

As you can see below, at the end of June 2023, Jastrzebska Spólka Weglowa had zł3.65b of debt, up from zł1.72b a year ago. Click the image for more detail. But on the other hand it also has zł4.74b in cash, leading to a zł1.10b net cash position.

How Healthy Is Jastrzebska Spólka Weglowa's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jastrzebska Spólka Weglowa had liabilities of zł7.46b due within 12 months and liabilities of zł3.43b due beyond that. On the other hand, it had cash of zł4.74b and zł2.09b worth of receivables due within a year. So its liabilities total zł4.06b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of zł5.52b, so it does suggest shareholders should keep an eye on Jastrzebska Spólka Weglowa's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Jastrzebska Spólka Weglowa boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Jastrzebska Spólka Weglowa's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 two years, Jastrzebska Spólka Weglowa produced sturdy free cash flow equating to 67% 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 zł1.10b. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in zł4.0b. So we don't have any problem with Jastrzebska Spólka Weglowa's use of debt. 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.