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. 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. As with many other companies Enter Air Sp. z o.o. (WSE:ENT) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Enter Air Sp. z o.o’s Debt?
The image below, which you can click on for greater detail, shows that Enter Air Sp. z o.o had debt of zł10.7m at the end of June 2019, a reduction from zł370.4m over a year. But it also has zł26.4m in cash to offset that, meaning it has zł15.7m net cash.
How Healthy Is Enter Air Sp. z o.o’s Balance Sheet?
The latest balance sheet data shows that Enter Air Sp. z o.o had liabilities of zł496.3m due within a year, and liabilities of zł1.03b falling due after that. On the other hand, it had cash of zł26.4m and zł235.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł1.27b.
This deficit casts a shadow over the zł701.8m company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt At the end of the day, Enter Air Sp. z o.o would probably need a major re-capitalization if its creditors were to demand repayment. Enter Air Sp. z o.o boasts net cash, so it’s fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
It is well worth noting that Enter Air Sp. z o.o’s EBIT shot up like bamboo after rain, gaining 89% in the last twelve months. That’ll make it easier to manage its debt. There’s no doubt that we learn most about debt from the balance sheet. But it is Enter Air Sp. z o.o’s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. Enter Air Sp. z o.o may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Enter Air Sp. z o.o actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Although Enter Air Sp. z o.o’s balance sheet isn’t particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł15.7m. And it impressed us with free cash flow of zł227m, being 112% of its EBIT. So we don’t have any problem with Enter Air Sp. z o.o’s use of debt. Over time, share prices tend to follow earnings per share, so if you’re interested in Enter Air Sp. z o.o, you may well want to click here to check an interactive graph of its earnings per share history.
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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