BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek (WSE:BML) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek S.A. (WSE:BML) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

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What Is BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek's Debt?

The image below, which you can click on for greater detail, shows that BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek had debt of zł9.38m at the end of June 2022, a reduction from zł12.8m over a year. However, its balance sheet shows it holds zł18.0m in cash, so it actually has zł8.65m net cash.

A Look At BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek's Liabilities

The latest balance sheet data shows that BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek had liabilities of zł22.3m due within a year, and liabilities of zł23.9m falling due after that. On the other hand, it had cash of zł18.0m and zł13.0m worth of receivables due within a year. So it has liabilities totalling zł15.2m more than its cash and near-term receivables, combined.

Since publicly traded BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek shares are worth a total of zł413.2m, 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, BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek has increased its EBIT by 6.5% 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 you can't view debt in total isolation; since BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek 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. Over the last three years, BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek has zł8.65m in net cash. On top of that, it increased its EBIT by 6.5% in the last twelve months. So we don't have any problem with BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek's use of debt. 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. For instance, we've identified 4 warning signs for BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek (2 are concerning) you should be aware of.

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.