Is BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek (WSE:BML) 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.' 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. Importantly, BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek S.A. (WSE:BML) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek

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

You can click the graphic below for the historical numbers, but it shows that as of September 2020 BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek had zł11.0m of debt, an increase on zł6.99m, over one year. 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?

We can see from the most recent balance sheet that BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek had liabilities of zł22.1m falling due within a year, and liabilities of zł25.1m due beyond that. On the other hand, it had cash of zł1.02m and zł7.17m worth of receivables due within a year. So it has liabilities totalling zł39.0m more than its cash and near-term receivables, combined.

Of course, BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek has a market capitalization of zł547.9m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

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. We also note that BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek improved its EBIT from a last year's loss to a positive zł5.0m. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek burned a lot of cash. 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 struggle to convert EBIT to free cash flow had us second guessing its balance sheet strength, but the other data-points we considered were relatively redeeming. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek that 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. 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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