Is Pkp Cargo (WSE:PKP) Weighed On By Its Debt Load?

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. We note that Pkp Cargo S.A. (WSE:PKP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Pkp Cargo

What Is Pkp Cargo's Debt?

As you can see below, Pkp Cargo had zł1.66b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have zł112.9m in cash offsetting this, leading to net debt of about zł1.55b.

A Look At Pkp Cargo's Liabilities

The latest balance sheet data shows that Pkp Cargo had liabilities of zł1.95b due within a year, and liabilities of zł2.53b falling due after that. Offsetting this, it had zł112.9m in cash and zł727.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł3.65b.

This deficit casts a shadow over the zł640.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Pkp Cargo would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Pkp Cargo can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Pkp Cargo wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to zł4.7b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Pkp Cargo had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable zł88m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized zł80m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. For riskier companies like Pkp Cargo I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.