Wasko (WSE:WAS) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Wasko S.A. (WSE:WAS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Wasko

How Much Debt Does Wasko Carry?

As you can see below, Wasko had zł8.45m of debt at December 2020, down from zł19.2m a year prior. However, its balance sheet shows it holds zł85.9m in cash, so it actually has zł77.4m net cash.

How Healthy Is Wasko's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wasko had liabilities of zł187.6m due within 12 months and liabilities of zł10.6m due beyond that. On the other hand, it had cash of zł85.9m and zł170.2m worth of receivables due within a year. So it actually has zł57.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that Wasko's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Wasko has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Wasko grew its EBIT by 158% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Wasko's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Wasko 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, Wasko 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

While it is always sensible to investigate a company's debt, in this case Wasko has zł77.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of zł52m, being 123% of its EBIT. The bottom line is that we do not find Wasko's debt levels at all concerning. 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. Be aware that Wasko is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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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