Grupa Kety (WSE:KTY) Could Easily Take On More Debt

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 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. As with many other companies Grupa Kety S.A. (WSE:KTY) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for Grupa Kety

What Is Grupa Kety's Debt?

The image below, which you can click on for greater detail, shows that Grupa Kety had debt of zł706.9m at the end of March 2021, a reduction from zł803.7m over a year. However, it also had zł196.0m in cash, and so its net debt is zł511.0m.

How Healthy Is Grupa Kety's Balance Sheet?

According to the last reported balance sheet, Grupa Kety had liabilities of zł791.4m due within 12 months, and liabilities of zł562.4m due beyond 12 months. On the other hand, it had cash of zł196.0m and zł655.6m worth of receivables due within a year. So it has liabilities totalling zł502.3m more than its cash and near-term receivables, combined.

Of course, Grupa Kety has a market capitalization of zł6.75b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Grupa Kety has a low net debt to EBITDA ratio of only 0.71. And its EBIT covers its interest expense a whopping 52.9 times over. So we're pretty relaxed about its super-conservative use of debt. In addition to that, we're happy to report that Grupa Kety has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. 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 Grupa Kety'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Grupa Kety produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, Grupa Kety's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its EBIT growth rate also supports that impression! Considering this range of factors, it seems to us that Grupa Kety is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Grupa Kety that you should be aware of before investing here.

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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