Asseco Poland (WSE:ACP) Seems To Use Debt Rather Sparingly

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. We can see that Asseco Poland S.A. (WSE:ACP) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Asseco Poland

What Is Asseco Poland's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Asseco Poland had zł2.35b of debt, an increase on zł2.16b, over one year. However, its balance sheet shows it holds zł2.40b in cash, so it actually has zł47.4m net cash.

A Look At Asseco Poland's Liabilities

Zooming in on the latest balance sheet data, we can see that Asseco Poland had liabilities of zł3.88b due within 12 months and liabilities of zł3.18b due beyond that. On the other hand, it had cash of zł2.40b and zł3.20b worth of receivables due within a year. So its liabilities total zł1.46b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Asseco Poland is worth zł5.58b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Asseco Poland boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Asseco Poland grew its EBIT at 17% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Asseco Poland can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Happily for any shareholders, Asseco Poland actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Asseco Poland does have more liabilities than liquid assets, it also has net cash of zł47.4m. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in zł1.5b. So is Asseco Poland's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Asseco Poland's dividend history, without delay!

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.

If you decide to trade Asseco Poland, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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