Is Stalprodukt (WSE:STP) Using Too Much Debt?

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.' 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 Stalprodukt S.A. (WSE:STP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Stalprodukt

How Much Debt Does Stalprodukt Carry?

You can click the graphic below for the historical numbers, but it shows that Stalprodukt had zł25.9m of debt in December 2022, down from zł82.7m, one year before. But on the other hand it also has zł633.3m in cash, leading to a zł607.4m net cash position.

How Healthy Is Stalprodukt's Balance Sheet?

According to the last reported balance sheet, Stalprodukt had liabilities of zł856.5m due within 12 months, and liabilities of zł461.0m due beyond 12 months. On the other hand, it had cash of zł633.3m and zł870.8m worth of receivables due within a year. So it can boast zł186.6m more liquid assets than total liabilities.

This surplus suggests that Stalprodukt has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Stalprodukt has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Stalprodukt grew its EBIT at 11% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Stalprodukt'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. While Stalprodukt has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Stalprodukt'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.

Summing Up

While it is always sensible to investigate a company's debt, in this case Stalprodukt has zł607.4m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 11% over the last year. So is Stalprodukt's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Stalprodukt , and understanding them should be part of your investment process.

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.