Is Czerwona Torebka Spólka Akcyjna (WSE:CZT) Using Too Much 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 Czerwona Torebka Spólka Akcyjna (WSE:CZT) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Czerwona Torebka Spólka Akcyjna

What Is Czerwona Torebka Spólka Akcyjna's Debt?

The image below, which you can click on for greater detail, shows that Czerwona Torebka Spólka Akcyjna had debt of zł80.5m at the end of September 2021, a reduction from zł86.7m over a year. On the flip side, it has zł33.7m in cash leading to net debt of about zł46.8m.

A Look At Czerwona Torebka Spólka Akcyjna's Liabilities

We can see from the most recent balance sheet that Czerwona Torebka Spólka Akcyjna had liabilities of zł29.0m falling due within a year, and liabilities of zł113.2m due beyond that. Offsetting this, it had zł33.7m in cash and zł11.9m in receivables that were due within 12 months. So it has liabilities totalling zł96.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the zł35.1m company, like a colossus towering over mere mortals. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Czerwona Torebka Spólka Akcyjna'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.

Over 12 months, Czerwona Torebka Spólka Akcyjna reported revenue of zł25m, which is a gain of 563%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

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. Its EBIT loss was a whopping zł7.0m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost zł15m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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 1 warning sign with Czerwona Torebka Spólka Akcyjna , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.