We Think ED Invest Spólka Akcyjna (WSE:EDI) Can Manage Its Debt With Ease

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. As with many other companies ED Invest Spólka Akcyjna (WSE:EDI) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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. 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 ED Invest Spólka Akcyjna

What Is ED Invest Spólka Akcyjna's Debt?

As you can see below, at the end of September 2020, ED Invest Spólka Akcyjna had zł7.57m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds zł26.1m in cash, so it actually has zł18.5m net cash.

How Healthy Is ED Invest Spólka Akcyjna's Balance Sheet?

According to the last reported balance sheet, ED Invest Spólka Akcyjna had liabilities of zł10.6m due within 12 months, and liabilities of zł16.8m due beyond 12 months. On the other hand, it had cash of zł26.1m and zł51.9m worth of receivables due within a year. So it can boast zł50.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that ED Invest Spólka Akcyjna's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, ED Invest Spólka Akcyjna boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that ED Invest Spólka Akcyjna grew its EBIT by 187% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since ED Invest 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ED Invest Spólka Akcyjna 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. Happily for any shareholders, ED Invest Spólka Akcyjna actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that ED Invest Spólka Akcyjna has net cash of zł18.5m and plenty of liquid assets. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in zł11m. The bottom line is that ED Invest Spólka Akcyjna's use of debt is absolutely fine. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with ED Invest Spólka Akcyjna , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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