These 4 Measures Indicate That ED Invest Spólka Akcyjna (WSE:EDI) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies ED Invest Spólka Akcyjna (WSE:EDI) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ED Invest Spólka Akcyjna

What Is ED Invest Spólka Akcyjna's Net Debt?

As you can see below, at the end of June 2020, ED Invest Spólka Akcyjna had zł7.58m of debt, up from zł2.10m a year ago. Click the image for more detail. However, its balance sheet shows it holds zł21.3m in cash, so it actually has zł13.7m net cash.

A Look At ED Invest Spólka Akcyjna's Liabilities

Zooming in on the latest balance sheet data, we can see that ED Invest Spólka Akcyjna had liabilities of zł12.1m due within 12 months and liabilities of zł16.0m due beyond that. Offsetting these obligations, it had cash of zł21.3m as well as receivables valued at zł55.3m due within 12 months. So it actually has zł48.4m more liquid assets than total liabilities.

This surplus strongly suggests that ED Invest Spólka Akcyjna has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that ED Invest Spólka Akcyjna has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, ED Invest Spólka Akcyjna grew its EBIT by 483% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is ED Invest 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ED Invest Spólka Akcyjna may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, ED Invest Spólka Akcyjna actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that ED Invest Spólka Akcyjna has net cash of zł13.7m and plenty of liquid assets. And it impressed us with free cash flow of zł2.2m, being 132% of its EBIT. At the end of the day we're not concerned about ED Invest Spólka Akcyjna's debt. 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. For example, we've discovered 3 warning signs for ED Invest Spólka Akcyjna (2 can't be ignored!) that you should be aware of before investing here.

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. 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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