Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Grupa Kety S.A. (WSE:KTY) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Grupa Kety
How Much Debt Does Grupa Kety Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2022 Grupa Kety had zł1.17b of debt, an increase on zł899.3m, over one year. On the flip side, it has zł205.8m in cash leading to net debt of about zł967.7m.
How Strong Is Grupa Kety's Balance Sheet?
According to the last reported balance sheet, Grupa Kety had liabilities of zł1.28b due within 12 months, and liabilities of zł1.03b due beyond 12 months. On the other hand, it had cash of zł205.8m and zł993.5m worth of receivables due within a year. So it has liabilities totalling zł1.11b more than its cash and near-term receivables, combined.
Grupa Kety has a market capitalization of zł4.94b, so it could very likely raise cash to ameliorate 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.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Grupa Kety's net debt is only 0.91 times its EBITDA. And its EBIT covers its interest expense a whopping 23.2 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 33%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Grupa Kety's free cash flow amounted to 40% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Our View
Happily, Grupa Kety's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. When we consider the range of factors above, it looks like Grupa Kety is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. 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. Be aware that Grupa Kety is showing 4 warning signs in our investment analysis , and 2 of those shouldn't be ignored...
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.
About WSE:KTY
Grupa Kety
Through its subsidiaries, manufactures and sells aluminum profiles and components in Poland and internationally.
Good value with proven track record.