Is Moliera2 (WSE:MO2) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Moliera2 S.A. (WSE:MO2) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Moliera2

What Is Moliera2's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Moliera2 had zł22.1m of debt, an increase on zł20.0m, over one year. However, it does have zł1.16m in cash offsetting this, leading to net debt of about zł21.0m.

How Healthy Is Moliera2's Balance Sheet?

We can see from the most recent balance sheet that Moliera2 had liabilities of zł32.5m falling due within a year, and liabilities of zł2.91m due beyond that. On the other hand, it had cash of zł1.16m and zł2.72m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł31.6m.

This is a mountain of leverage relative to its market capitalization of zł36.8m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Moliera2'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.

In the last year Moliera2 wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to zł111m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Moliera2 had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping zł14m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of zł17m. In the meantime, we consider the stock very risky. 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. For instance, we've identified 3 warning signs for Moliera2 that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.