Jastrzebska Spólka Weglowa (WSE:JSW) Seems To Use Debt Quite Sensibly

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.' 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 note that Jastrzebska Spólka Weglowa S.A. (WSE:JSW) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jastrzebska Spólka Weglowa

What Is Jastrzebska Spólka Weglowa's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Jastrzebska Spólka Weglowa had debt of zł3.14b, up from zł2.04b in one year. But on the other hand it also has zł5.32b in cash, leading to a zł2.18b net cash position.

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 zł7.16b due within 12 months and liabilities of zł3.30b due beyond that. Offsetting these obligations, it had cash of zł5.32b as well as receivables valued at zł1.92b due within 12 months. So its liabilities total zł3.22b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Jastrzebska Spólka Weglowa has a market capitalization of zł6.75b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without 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.

Although Jastrzebska Spólka Weglowa made a loss at the EBIT level, last year, it was also good to see that it generated zł9.5b in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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. 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 last year, Jastrzebska Spólka Weglowa recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Jastrzebska Spólka Weglowa does have more liabilities than liquid assets, it also has net cash of zł2.18b. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in zł8.0b. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Jastrzebska Spólka Weglowa (1 is concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.