These 4 Measures Indicate That Oponeo.pl (WSE:OPN) Is Using Debt Safely

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 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. Importantly, Oponeo.pl S.A. (WSE:OPN) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Oponeo.pl

What Is Oponeo.pl's Debt?

As you can see below, at the end of September 2020, Oponeo.pl had zł15.8m of debt, up from none a year ago. Click the image for more detail. However, it does have zł54.5m in cash offsetting this, leading to net cash of zł38.7m.

How Strong Is Oponeo.pl's Balance Sheet?

The latest balance sheet data shows that Oponeo.pl had liabilities of zł235.8m due within a year, and liabilities of zł7.41m falling due after that. On the other hand, it had cash of zł54.5m and zł29.0m worth of receivables due within a year. So it has liabilities totalling zł159.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Oponeo.pl is worth zł556.0m, and thus could probably raise enough capital to shore up 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. Despite its noteworthy liabilities, Oponeo.pl boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Oponeo.pl grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Oponeo.pl 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Oponeo.pl may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Oponeo.pl generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While Oponeo.pl does have more liabilities than liquid assets, it also has net cash of zł38.7m. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in zł63m. So we don't think Oponeo.pl's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Oponeo.pl's earnings per share history for free.

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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