Is A.P.N. Promise (WSE:PRO) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 A.P.N. Promise S.A. (WSE:PRO) 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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for A.P.N. Promise

What Is A.P.N. Promise's Net Debt?

You can click the graphic below for the historical numbers, but it shows that A.P.N. Promise had zł26.0m of debt in December 2022, down from zł28.8m, one year before. But it also has zł98.5m in cash to offset that, meaning it has zł72.4m net cash.

How Strong Is A.P.N. Promise's Balance Sheet?

We can see from the most recent balance sheet that A.P.N. Promise had liabilities of zł247.2m falling due within a year, and liabilities of zł273.5k due beyond that. Offsetting this, it had zł98.5m in cash and zł133.5m in receivables that were due within 12 months. So it has liabilities totalling zł15.6m more than its cash and near-term receivables, combined.

A.P.N. Promise has a market capitalization of zł39.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, A.P.N. Promise also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, A.P.N. Promise grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since A.P.N. Promise will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While A.P.N. Promise 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, A.P.N. Promise actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although A.P.N. Promise's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł72.4m. And it impressed us with free cash flow of zł89m, being 741% of its EBIT. So we are not troubled with A.P.N. Promise's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with A.P.N. Promise (including 2 which are a bit unpleasant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.