Aqua Spólka Akcyjna (WSE:AQU) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Aqua Spólka Akcyjna (WSE:AQU) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Aqua Spólka Akcyjna

What Is Aqua Spólka Akcyjna's Net Debt?

As you can see below, Aqua Spólka Akcyjna had zł6.64m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds zł31.1m in cash, so it actually has zł24.5m net cash.

A Look At Aqua Spólka Akcyjna's Liabilities

According to the last reported balance sheet, Aqua Spólka Akcyjna had liabilities of zł91.6m due within 12 months, and liabilities of zł26.2m due beyond 12 months. Offsetting these obligations, it had cash of zł31.1m as well as receivables valued at zł24.0m due within 12 months. So its liabilities total zł62.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Aqua Spólka Akcyjna is worth zł262.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

On top of that, Aqua Spólka Akcyjna grew its EBIT by 30% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Aqua Spólka Akcyjna 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. In the last three years, Aqua Spólka Akcyjna's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

Although Aqua Spólka Akcyjna's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł24.5m. And we liked the look of last year's 30% year-on-year EBIT growth. So is Aqua Spólka Akcyjna's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 3 warning signs for Aqua Spólka Akcyjna you should be aware of, and 1 of them is significant.

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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