These 4 Measures Indicate That Kino Polska TV Spolka Akcyjna (WSE:KPL) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Kino Polska TV Spolka Akcyjna (WSE:KPL) does use debt in its business. But the real question is whether this debt is making the company risky.

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Kino Polska TV Spolka Akcyjna

What Is Kino Polska TV Spolka Akcyjna's Debt?

The chart below, which you can click on for greater detail, shows that Kino Polska TV Spolka Akcyjna had zł60.9m in debt in September 2020; about the same as the year before. However, it also had zł11.1m in cash, and so its net debt is zł49.8m.

How Healthy Is Kino Polska TV Spolka Akcyjna's Balance Sheet?

We can see from the most recent balance sheet that Kino Polska TV Spolka Akcyjna had liabilities of zł56.6m falling due within a year, and liabilities of zł73.9m due beyond that. Offsetting this, it had zł11.1m in cash and zł67.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł51.8m.

While this might seem like a lot, it is not so bad since Kino Polska TV Spolka Akcyjna has a market capitalization of zł151.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Kino Polska TV Spolka Akcyjna's net debt is only 1.4 times its EBITDA. And its EBIT easily covers its interest expense, being 16.9 times the size. So we're pretty relaxed about its super-conservative use of debt. The good news is that Kino Polska TV Spolka Akcyjna has increased its EBIT by 5.3% over twelve months, which should ease any concerns about debt repayment. 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 Kino Polska TV Spolka Akcyjna's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, Kino Polska TV Spolka Akcyjna recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

The good news is that Kino Polska TV Spolka Akcyjna's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And we also thought its conversion of EBIT to free cash flow was a positive. All these things considered, it appears that Kino Polska TV Spolka Akcyjna can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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. To that end, you should be aware of the 3 warning signs we've spotted with Kino Polska TV Spolka Akcyjna .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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