Is Moliera2 (WSE:MO2) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Moliera2 SA (WSE:MO2) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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 Moliera2

What Is Moliera2's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Moliera2 had debt of zł21.2m, up from zł12.8m in one year. On the flip side, it has zł5.61m in cash leading to net debt of about zł15.6m.

How Strong Is Moliera2's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Moliera2 had liabilities of zł35.2m due within 12 months and liabilities of zł4.48m due beyond that. On the other hand, it had cash of zł5.61m and zł2.58m worth of receivables due within a year. So it has liabilities totalling zł31.5m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of zł51.1m, so it does suggest shareholders should keep an eye on Moliera2's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Moliera2 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.

In the last year Moliera2 wasn't profitable at an EBIT level, but managed to grow its revenue by 184%, to zł124m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

While we can certainly appreciate Moliera2's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable zł9.0m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled zł9.5m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Moliera2 (including 1 which doesn't sit too well with us) .

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. 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.