Does KCI Spolka Akcyjna (WSE:KCI) Have A Healthy Balance Sheet?

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 KCI Spolka Akcyjna (WSE:KCI) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 KCI Spolka Akcyjna

How Much Debt Does KCI Spolka Akcyjna Carry?

You can click the graphic below for the historical numbers, but it shows that KCI Spolka Akcyjna had zł14.0m of debt in September 2020, down from zł19.5m, one year before. However, its balance sheet shows it holds zł126.6m in cash, so it actually has zł112.6m net cash.

How Healthy Is KCI Spolka Akcyjna's Balance Sheet?

According to the last reported balance sheet, KCI Spolka Akcyjna had liabilities of zł23.5m due within 12 months, and liabilities of zł43.2m due beyond 12 months. Offsetting these obligations, it had cash of zł126.6m as well as receivables valued at zł82.3m due within 12 months. So it actually has zł142.2m more liquid assets than total liabilities.

This excess liquidity is a great indication that KCI Spolka Akcyjna's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that KCI Spolka Akcyjna has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that KCI Spolka Akcyjna has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is KCI Spolka Akcyjna's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While KCI Spolka 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. During the last three years, KCI Spolka Akcyjna generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that KCI Spolka Akcyjna has net cash of zł112.6m and plenty of liquid assets. And it impressed us with free cash flow of zł11m, being 93% of its EBIT. At the end of the day we're not concerned about KCI Spolka Akcyjna's debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for KCI Spolka Akcyjna that you should be aware of.

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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