KCI Spolka Akcyjna (WSE:KCI) Has A Rock Solid Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that KCI Spolka Akcyjna (WSE:KCI) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

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. But on the other hand it also has zł125.3m in cash, leading to a zł111.2m net cash position.

A Look At KCI Spolka Akcyjna's Liabilities

The latest balance sheet data shows that KCI Spolka Akcyjna had liabilities of zł23.5m due within a year, and liabilities of zł43.2m falling due after that. Offsetting these obligations, it had cash of zł125.3m as well as receivables valued at zł82.3m due within 12 months. So it can boast zł140.8m more liquid assets than total liabilities.

This luscious liquidity implies that KCI Spolka Akcyjna's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 zł111.2m and plenty of liquid assets. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in zł11m. The bottom line is that KCI Spolka 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 KCI Spolka Akcyjna , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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