Is Czerwona Torebka Spólka Akcyjna (WSE:CZT) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Czerwona Torebka Spólka Akcyjna (WSE:CZT) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Czerwona Torebka Spólka Akcyjna

What Is Czerwona Torebka Spólka Akcyjna's Debt?

You can click the graphic below for the historical numbers, but it shows that Czerwona Torebka Spólka Akcyjna had zł30.8m of debt in June 2023, down from zł58.8m, one year before. However, it also had zł26.2m in cash, and so its net debt is zł4.65m.

How Healthy Is Czerwona Torebka Spólka Akcyjna's Balance Sheet?

According to the last reported balance sheet, Czerwona Torebka Spólka Akcyjna had liabilities of zł30.2m due within 12 months, and liabilities of zł55.2m due beyond 12 months. On the other hand, it had cash of zł26.2m and zł2.02m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł57.1m.

When you consider that this deficiency exceeds the company's zł46.5m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Czerwona Torebka Spólka Akcyjna 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.

Over 12 months, Czerwona Torebka Spólka Akcyjna reported revenue of zł14m, which is a gain of 94%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Czerwona Torebka Spólka Akcyjna still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost zł4.4m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of zł15m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. Be aware that Czerwona Torebka Spólka Akcyjna is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.