Asseco Poland (WSE:ACP) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Asseco Poland S.A. (WSE:ACP) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Asseco Poland

What Is Asseco Poland's Net Debt?

The chart below, which you can click on for greater detail, shows that Asseco Poland had zł2.98b in debt in March 2023; about the same as the year before. But on the other hand it also has zł3.19b in cash, leading to a zł209.9m net cash position.

How Strong Is Asseco Poland's Balance Sheet?

The latest balance sheet data shows that Asseco Poland had liabilities of zł6.14b due within a year, and liabilities of zł3.39b falling due after that. Offsetting these obligations, it had cash of zł3.19b as well as receivables valued at zł5.26b due within 12 months. So it has liabilities totalling zł1.07b more than its cash and near-term receivables, combined.

Given Asseco Poland has a market capitalization of zł6.35b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Asseco Poland boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Asseco Poland has increased its EBIT by 5.2% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Asseco Poland's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Asseco Poland 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. Over the last three years, Asseco Poland recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Asseco Poland's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł209.9m. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in zł1.4b. So we don't think Asseco Poland's use of debt is risky. Given Asseco Poland has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.

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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.