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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Czerwona Torebka Spólka Akcyjna (WSE:CZT) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Czerwona Torebka Spólka Akcyjna

What Is Czerwona Torebka Spólka Akcyjna's Net Debt?

As you can see below, Czerwona Torebka Spólka Akcyjna had zł81.4m of debt at June 2021, down from zł96.2m a year prior. However, it also had zł35.7m in cash, and so its net debt is zł45.7m.

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

The latest balance sheet data shows that Czerwona Torebka Spólka Akcyjna had liabilities of zł29.8m due within a year, and liabilities of zł116.9m falling due after that. Offsetting these obligations, it had cash of zł35.7m as well as receivables valued at zł13.0m due within 12 months. So it has liabilities totalling zł98.1m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the zł52.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Czerwona Torebka Spólka Akcyjna would probably need a major re-capitalization if its creditors were to demand repayment. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Czerwona Torebka Spólka Akcyjna wasn't profitable at an EBIT level, but managed to grow its revenue by 289%, to zł22m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Even though Czerwona Torebka Spólka Akcyjna managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable zł11m 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 zł2.8m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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 instance, we've identified 1 warning sign for Czerwona Torebka Spólka Akcyjna that you should be aware of.

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.

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.

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