Here's Why KCI Spolka Akcyjna (WSE:KCI) Can Manage Its Debt Responsibly

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. We can see that KCI Spolka Akcyjna (WSE:KCI) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for KCI Spolka Akcyjna

How Much Debt Does KCI Spolka Akcyjna Carry?

As you can see below, KCI Spolka Akcyjna had zł15.7m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have zł1.70m in cash offsetting this, leading to net debt of about zł14.0m.

How Strong Is KCI Spolka Akcyjna's Balance Sheet?

According to the last reported balance sheet, KCI Spolka Akcyjna had liabilities of zł48.0m due within 12 months, and liabilities of zł47.1m due beyond 12 months. On the other hand, it had cash of zł1.70m and zł49.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł44.3m.

This is a mountain of leverage relative to its market capitalization of zł72.1m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

KCI Spolka Akcyjna's net debt is only 0.59 times its EBITDA. And its EBIT easily covers its interest expense, being 59.3 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. And we also note warmly that KCI Spolka Akcyjna grew its EBIT by 13% last year, making its debt load easier to handle. 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 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. So we always check how much of that EBIT is translated into free cash flow. During the last three years, KCI Spolka Akcyjna produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

KCI Spolka Akcyjna's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its level of total liabilities does undermine this impression a bit. All these things considered, it appears that KCI Spolka Akcyjna can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for KCI Spolka Akcyjna (of which 1 is concerning!) you should know about.

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. 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.