We Think Asseco Poland (WSE:ACP) Can Manage Its Debt With Ease

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.' 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. 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?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Asseco Poland

What Is Asseco Poland's Debt?

As you can see below, at the end of December 2022, Asseco Poland had zł3.17b of debt, up from zł2.59b a year ago. Click the image for more detail. But on the other hand it also has zł3.64b in cash, leading to a zł477.0m net cash position.

How Strong Is Asseco Poland's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Asseco Poland had liabilities of zł6.30b due within 12 months and liabilities of zł3.62b due beyond that. Offsetting these obligations, it had cash of zł3.64b as well as receivables valued at zł5.03b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł1.24b.

Of course, Asseco Poland has a market capitalization of zł7.17b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 9.8% 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, 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. Over the last three years, Asseco Poland actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Asseco Poland does have more liabilities than liquid assets, it also has net cash of zł477.0m. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in zł1.4b. So we don't think Asseco Poland's use of debt is risky. 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!

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.

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

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.