OEX (WSE:OEX) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies OEX S.A. (WSE:OEX) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for OEX

How Much Debt Does OEX Carry?

As you can see below, OEX had zł37.8m of debt at September 2020, down from zł85.4m a year prior. But it also has zł51.7m in cash to offset that, meaning it has zł13.9m net cash.

A Look At OEX's Liabilities

We can see from the most recent balance sheet that OEX had liabilities of zł145.4m falling due within a year, and liabilities of zł72.1m due beyond that. Offsetting these obligations, it had cash of zł51.7m as well as receivables valued at zł111.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł54.5m.

While this might seem like a lot, it is not so bad since OEX has a market capitalization of zł145.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, OEX boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably OEX's EBIT was pretty flat over the last year. We would prefer to see some earnings growth, because that always helps diminish 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 OEX will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While OEX 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, OEX 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 OEX does have more liabilities than liquid assets, it also has net cash of zł13.9m. And it impressed us with free cash flow of zł55m, being 188% of its EBIT. So we are not troubled with OEX's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that OEX is showing 3 warning signs in our investment analysis , you should know about...

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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