Here's Why Figene Capital Spólka Akcyjna (WSE:FIG) Can Afford Some Debt

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. As with many other companies Figene Capital Spólka Akcyjna (WSE:FIG) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Figene Capital Spólka Akcyjna

How Much Debt Does Figene Capital Spólka Akcyjna Carry?

As you can see below, at the end of June 2022, Figene Capital Spólka Akcyjna had zł12.6m of debt, up from zł7.60m a year ago. Click the image for more detail. However, because it has a cash reserve of zł1.62m, its net debt is less, at about zł11.0m.

How Healthy Is Figene Capital Spólka Akcyjna's Balance Sheet?

The latest balance sheet data shows that Figene Capital Spólka Akcyjna had liabilities of zł19.6m due within a year, and liabilities of zł29.1m falling due after that. Offsetting this, it had zł1.62m in cash and zł22.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł24.7m.

Since publicly traded Figene Capital Spólka Akcyjna shares are worth a total of zł491.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Figene Capital 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.

Over 12 months, Figene Capital Spólka Akcyjna reported revenue of zł14m, which is a gain of 455%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Even though Figene Capital Spólka Akcyjna managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost zł1.9m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through zł10m of cash over the last year. So to be blunt we think it is risky. 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. We've identified 4 warning signs with Figene Capital Spólka Akcyjna (at least 2 which are significant) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.