BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek (WSE:BML) Takes On Some Risk With Its Use Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek S.A. (WSE:BML) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek

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

As you can see below, at the end of September 2020, BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek had zł11.0m of debt, up from zł6.99m a year ago. Click the image for more detail. However, it does have zł1.02m in cash offsetting this, leading to net debt of about zł9.95m.

How Strong Is BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek's Balance Sheet?

According to the last reported balance sheet, BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek had liabilities of zł22.1m due within 12 months, and liabilities of zł25.1m due beyond 12 months. On the other hand, it had cash of zł1.02m and zł7.17m worth of receivables due within a year. So its liabilities total zł39.0m more than the combination of its cash and short-term receivables.

Given BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek has a market capitalization of zł712.9m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek's low debt to EBITDA ratio of 0.96 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 3.0 times last year does give us pause. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Notably, BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek made a loss at the EBIT level, last year, but improved that to positive EBIT of zł5.0m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, 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.

Our View

BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. For example, its net debt to EBITDA is relatively strong. We think that BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek that you should be aware of before investing here.

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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