Is Polenergia (WSE:PEP) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Polenergia S.A. (WSE:PEP) does carry debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Polenergia

How Much Debt Does Polenergia Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Polenergia had zł1.36b of debt, an increase on zł1.30b, over one year. However, it does have zł3.14b in cash offsetting this, leading to net cash of zł1.77b.

A Look At Polenergia's Liabilities

According to the last reported balance sheet, Polenergia had liabilities of zł2.85b due within 12 months, and liabilities of zł2.24b due beyond 12 months. Offsetting these obligations, it had cash of zł3.14b as well as receivables valued at zł453.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł1.50b.

While this might seem like a lot, it is not so bad since Polenergia has a market capitalization of zł6.18b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Polenergia boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Polenergia saw its EBIT decline by 6.5% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Polenergia can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Polenergia 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, Polenergia burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although Polenergia's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł1.77b. So although we see some areas for improvement, we're not too worried about Polenergia's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Polenergia has 3 warning signs (and 2 which are significant) we think you should know about.

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.

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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.