Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Net Debt?
As you can see below, Asseco Poland had zł2.38b of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has zł2.60b in cash, leading to a zł228.1m net cash position.
How Healthy Is Asseco Poland's Balance Sheet?
The latest balance sheet data shows that Asseco Poland had liabilities of zł4.62b due within a year, and liabilities of zł3.16b falling due after that. Offsetting this, it had zł2.60b in cash and zł3.94b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł1.23b.
Of course, Asseco Poland has a market capitalization of zł6.96b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Asseco Poland also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also positive, Asseco Poland grew its EBIT by 24% 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 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Asseco Poland has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. 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
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 zł228.1m. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in zł1.4b. So is Asseco Poland's debt a risk? It doesn't seem so to us. 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.
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About WSE:ACP
Asseco Poland
Develops and sells software products primarily in Poland, rest of Europe, the United States, Israel, Africa, and internationally.
Undervalued with excellent balance sheet and pays a dividend.
