These 4 Measures Indicate That CPD (WSE:CPD) Is Using Debt Reasonably Well

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.' 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 CPD S.A. (WSE:CPD) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 CPD

How Much Debt Does CPD Carry?

You can click the graphic below for the historical numbers, but it shows that CPD had zł89.2m of debt in March 2022, down from zł101.4m, one year before. But on the other hand it also has zł96.0m in cash, leading to a zł6.74m net cash position.

How Strong Is CPD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CPD had liabilities of zł56.4m due within 12 months and liabilities of zł74.8m due beyond that. Offsetting these obligations, it had cash of zł96.0m as well as receivables valued at zł2.73m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł32.5m.

This deficit isn't so bad because CPD is worth zł102.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, CPD boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that CPD grew its EBIT by 1,093% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is CPD's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While CPD 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. During the last three years, CPD burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

Although CPD's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł6.74m. And we liked the look of last year's 1,093% year-on-year EBIT growth. So we don't have any problem with CPD's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with CPD , and understanding them should be part of your investment process.

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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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.