Moliera2 (WSE:MO2) Is Making Moderate Use Of Debt

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.' 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 note that Moliera2 S.A. (WSE:MO2) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Moliera2

What Is Moliera2's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Moliera2 had zł21.2m of debt, an increase on zł12.8m, over one year. However, it does have zł5.61m in cash offsetting this, leading to net debt of about zł15.6m.

How Strong Is Moliera2's Balance Sheet?

The latest balance sheet data shows that Moliera2 had liabilities of zł35.2m due within a year, and liabilities of zł4.48m falling due after that. Offsetting this, it had zł5.61m in cash and zł2.95m in receivables that were due within 12 months. So its liabilities total zł31.1m more than the combination of its cash and short-term receivables.

Moliera2 has a market capitalization of zł61.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 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. 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 4 warning signs with Moliera2 (at least 3 which are a bit concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.