Is Aqua Spólka Akcyjna (WSE:AQU) Using Too Much Debt?

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.' 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. We can see that Aqua Spólka Akcyjna (WSE:AQU) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Aqua Spólka Akcyjna

What Is Aqua Spólka Akcyjna's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Aqua Spólka Akcyjna had debt of zł9.98m, up from zł9.14m in one year. But it also has zł59.9m in cash to offset that, meaning it has zł49.9m net cash.

How Strong Is Aqua Spólka Akcyjna's Balance Sheet?

According to the last reported balance sheet, Aqua Spólka Akcyjna had liabilities of zł90.4m due within 12 months, and liabilities of zł25.9m due beyond 12 months. Offsetting these obligations, it had cash of zł59.9m as well as receivables valued at zł28.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł27.7m.

Since publicly traded Aqua Spólka Akcyjna shares are worth a total of zł202.6m, 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. Despite its noteworthy liabilities, Aqua Spólka Akcyjna boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Aqua Spólka Akcyjna grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Aqua Spólka Akcyjna 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. Looking at the most recent three years, Aqua Spólka Akcyjna recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

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 zł49.9m. And it impressed us with its EBIT growth of 45% over the last year. So is Aqua Spólka Akcyjna's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Aqua Spólka Akcyjna .

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.