We Think Aqua Spólka Akcyjna (WSE:AQU) Can Stay On Top Of Its Debt

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. We note that Aqua Spólka Akcyjna (WSE:AQU) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. 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.

See 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 September 2020 Aqua Spólka Akcyjna had zł7.34m of debt, an increase on zł5.82m, over one year. However, its balance sheet shows it holds zł29.3m in cash, so it actually has zł22.0m net cash.

How Strong Is Aqua Spólka Akcyjna's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aqua Spólka Akcyjna had liabilities of zł92.5m due within 12 months and liabilities of zł33.9m due beyond that. Offsetting these obligations, it had cash of zł29.3m as well as receivables valued at zł23.5m due within 12 months. So it has liabilities totalling zł73.6m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Aqua Spólka Akcyjna is worth zł209.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

It is just as well that Aqua Spólka Akcyjna's load is not too heavy, because its EBIT was down 31% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is Aqua Spólka Akcyjna's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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 zł22.0m. So we are not troubled with Aqua Spólka Akcyjna's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Aqua Spólka Akcyjna (of which 1 is a bit concerning!) you should know about.

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.

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