We Think Comarch (WSE:CMR) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Comarch S.A. (WSE:CMR) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Comarch

What Is Comarch's Net Debt?

As you can see below, Comarch had zł168.2m of debt at September 2020, down from zł188.8m a year prior. However, its balance sheet shows it holds zł407.1m in cash, so it actually has zł238.9m net cash.

How Healthy Is Comarch's Balance Sheet?

The latest balance sheet data shows that Comarch had liabilities of zł617.9m due within a year, and liabilities of zł249.7m falling due after that. Offsetting these obligations, it had cash of zł407.1m as well as receivables valued at zł571.4m due within 12 months. So it can boast zł111.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Comarch could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Comarch boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Comarch grew its EBIT at 12% 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 Comarch can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Comarch 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, Comarch recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Comarch has net cash of zł238.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in zł224m. So we don't think Comarch's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Comarch, 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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