Asseco South Eastern Europe (WSE:ASE) Has A Rock Solid Balance Sheet

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 note that Asseco South Eastern Europe S.A. (WSE:ASE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Asseco South Eastern Europe

What Is Asseco South Eastern Europe's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Asseco South Eastern Europe had zł92.1m of debt, an increase on zł52.7m, over one year. However, it does have zł248.7m in cash offsetting this, leading to net cash of zł156.6m.

A Look At Asseco South Eastern Europe's Liabilities

The latest balance sheet data shows that Asseco South Eastern Europe had liabilities of zł373.0m due within a year, and liabilities of zł150.4m falling due after that. Offsetting these obligations, it had cash of zł248.7m as well as receivables valued at zł259.0m due within 12 months. So its liabilities total zł15.8m more than the combination of its cash and short-term receivables.

Having regard to Asseco South Eastern Europe's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the zł2.56b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Asseco South Eastern Europe also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Asseco South Eastern Europe grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. 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 South Eastern Europe'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 South Eastern Europe 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 South Eastern Europe 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Asseco South Eastern Europe has zł156.6m in net cash. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in zł195m. So we don't think Asseco South Eastern Europe's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Asseco South Eastern Europe, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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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.