These 4 Measures Indicate That Enter Air Sp. z o.o (WSE:ENT) Is Using Debt Extensively

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Enter Air Sp. z o.o. (WSE:ENT) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Enter Air Sp. z o.o

What Is Enter Air Sp. z o.o's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Enter Air Sp. z o.o had debt of zł224.6m, up from zł199.9m in one year. However, because it has a cash reserve of zł217.9m, its net debt is less, at about zł6.76m.

How Healthy Is Enter Air Sp. z o.o's Balance Sheet?

We can see from the most recent balance sheet that Enter Air Sp. z o.o had liabilities of zł673.5m falling due within a year, and liabilities of zł1.08b due beyond that. On the other hand, it had cash of zł217.9m and zł177.7m worth of receivables due within a year. So it has liabilities totalling zł1.36b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's zł1.11b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Enter Air Sp. z o.o may have virtually no net debt, but it does have a lot of liabilities.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Enter Air Sp. z o.o has a net debt to EBITDA ratio of 0.017, suggesting a very conservative balance sheet. But strangely, EBIT was only 2.1 times interest expenses, suggesting the that may paint an overly pretty picture of the stock. Shareholders should be aware that Enter Air Sp. z o.o's EBIT was down 21% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 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 company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Enter Air Sp. z o.o actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

To be frank both Enter Air Sp. z o.o's interest cover and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Enter Air Sp. z o.o stock a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less 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.

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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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.