Is Asseco Poland (WSE:ACP) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Asseco Poland S.A. (WSE:ACP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Asseco Poland

What Is Asseco Poland's Debt?

As you can see below, at the end of June 2022, Asseco Poland had zł2.75b of debt, up from zł2.38b a year ago. Click the image for more detail. However, it does have zł2.79b in cash offsetting this, leading to net cash of zł40.6m.

How Healthy Is Asseco Poland's Balance Sheet?

The latest balance sheet data shows that Asseco Poland had liabilities of zł5.89b due within a year, and liabilities of zł3.23b falling due after that. On the other hand, it had cash of zł2.79b and zł4.84b worth of receivables due within a year. So it has liabilities totalling zł1.49b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Asseco Poland is worth zł5.40b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 good is that Asseco Poland grew its EBIT at 16% 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 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, 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 zł40.6m. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in zł1.3b. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.