These 4 Measures Indicate That Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP (WSE:KMP) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP S.A. (WSE:KMP) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP

How Much Debt Does Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP Carry?

You can click the graphic below for the historical numbers, but it shows that Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP had zł8.63m of debt in March 2020, down from zł12.2m, one year before. However, it does have zł1.73m in cash offsetting this, leading to net debt of about zł6.90m.

A Look At Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's Liabilities

Zooming in on the latest balance sheet data, we can see that Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP had liabilities of zł25.2m due within 12 months and liabilities of zł18.1m due beyond that. On the other hand, it had cash of zł1.73m and zł22.5m worth of receivables due within a year. So its liabilities total zł19.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP is worth zł33.9m, 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP has a low net debt to EBITDA ratio of only 0.52. And its EBIT covers its interest expense a whopping 11.5 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Better yet, Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP grew its EBIT by 363% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Happily for any shareholders, Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's conversion of EBIT to free cash flow suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its level of total liabilities. Zooming out, Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP (of which 2 can't be ignored!) you should know about.

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.

If you decide to trade Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.