Aqua Spólka Akcyjna (WSE:AQU) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Aqua Spólka Akcyjna (WSE:AQU) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Aqua Spólka Akcyjna

What Is Aqua Spólka Akcyjna's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Aqua Spólka Akcyjna had zł6.18m of debt, an increase on zł4.30m, over one year. But on the other hand it also has zł46.0m in cash, leading to a zł39.8m net cash position.

How Healthy Is Aqua Spólka Akcyjna's Balance Sheet?

We can see from the most recent balance sheet that Aqua Spólka Akcyjna had liabilities of zł90.8m falling due within a year, and liabilities of zł17.9m due beyond that. Offsetting this, it had zł46.0m in cash and zł24.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł38.7m.

Since publicly traded Aqua Spólka Akcyjna shares are worth a total of zł241.6m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Aqua Spólka Akcyjna also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Aqua Spólka Akcyjna grew its EBIT by 15% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Aqua Spólka Akcyjna will need earnings to service that debt. 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 Aqua Spólka Akcyjna 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. During the last three years, Aqua Spólka Akcyjna produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Aqua Spólka Akcyjna does have more liabilities than liquid assets, it also has net cash of zł39.8m. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in -zł908k. So is Aqua Spólka Akcyjna's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Aqua Spólka Akcyjna (1 is a bit concerning) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.