Is Selena FM (WSE:SEL) A Risky Investment?

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 Selena FM S.A. (WSE:SEL) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Selena FM

What Is Selena FM's Debt?

You can click the graphic below for the historical numbers, but it shows that Selena FM had zł70.0m of debt in September 2020, down from zł164.1m, one year before. However, its balance sheet shows it holds zł95.1m in cash, so it actually has zł25.1m net cash.

A Look At Selena FM's Liabilities

Zooming in on the latest balance sheet data, we can see that Selena FM had liabilities of zł421.7m due within 12 months and liabilities of zł56.6m due beyond that. Offsetting these obligations, it had cash of zł95.1m as well as receivables valued at zł332.5m due within 12 months. So its liabilities total zł50.6m more than the combination of its cash and short-term receivables.

Since publicly traded Selena FM shares are worth a total of zł388.2m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Selena FM boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Selena FM has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Selena FM will need earnings to service that debt. 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. Selena FM 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 most recent three years, Selena FM recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Selena FM's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł25.1m. And it impressed us with its EBIT growth of 36% over the last year. So we don't think Selena FM's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Selena FM .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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