Is Grupa Azoty Zaklady Chemiczne Police (WSE:PCE) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Grupa Azoty Zaklady Chemiczne Police S.A. (WSE:PCE) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Grupa Azoty Zaklady Chemiczne Police

What Is Grupa Azoty Zaklady Chemiczne Police's Net Debt?

As you can see below, at the end of September 2024, Grupa Azoty Zaklady Chemiczne Police had zł1.15b of debt, up from zł787.2m a year ago. Click the image for more detail. However, it does have zł53.8m in cash offsetting this, leading to net debt of about zł1.10b.

How Strong Is Grupa Azoty Zaklady Chemiczne Police's Balance Sheet?

We can see from the most recent balance sheet that Grupa Azoty Zaklady Chemiczne Police had liabilities of zł1.97b falling due within a year, and liabilities of zł546.8m due beyond that. Offsetting this, it had zł53.8m in cash and zł318.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł2.15b.

This deficit casts a shadow over the zł1.06b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Grupa Azoty Zaklady Chemiczne Police would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Grupa Azoty Zaklady Chemiczne Police's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Grupa Azoty Zaklady Chemiczne Police had a loss before interest and tax, and actually shrunk its revenue by 27%, to zł2.6b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Grupa Azoty Zaklady Chemiczne Police's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable zł145m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of zł995m. And until that time we think this is a risky stock. 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. For example - Grupa Azoty Zaklady Chemiczne Police 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.

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

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.