We Think ED Invest Spólka Akcyjna (WSE:EDI) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that ED Invest Spólka Akcyjna (WSE:EDI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for ED Invest Spólka Akcyjna

How Much Debt Does ED Invest Spólka Akcyjna Carry?

You can click the graphic below for the historical numbers, but it shows that ED Invest Spólka Akcyjna had zł6.82m of debt in September 2021, down from zł7.57m, one year before. However, its balance sheet shows it holds zł33.6m in cash, so it actually has zł26.8m net cash.

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

According to the last reported balance sheet, ED Invest Spólka Akcyjna had liabilities of zł6.18m due within 12 months, and liabilities of zł13.2m due beyond 12 months. Offsetting this, it had zł33.6m in cash and zł42.0m in receivables that were due within 12 months. So it can boast zł56.2m 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!

On the other hand, ED Invest Spólka Akcyjna's EBIT dived 18%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 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 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. Looking at the most recent three years, ED Invest Spólka Akcyjna recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case ED Invest Spólka Akcyjna has zł26.8m in net cash and a strong balance sheet. So is ED Invest Spólka Akcyjna's debt a risk? It doesn't seem so to us. 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 that you should be aware of before investing here.

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.