Does PGE Polska Grupa Energetyczna (WSE:PGE) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that PGE Polska Grupa Energetyczna S.A. (WSE:PGE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for PGE Polska Grupa Energetyczna

What Is PGE Polska Grupa Energetyczna's Net Debt?

As you can see below, PGE Polska Grupa Energetyczna had zł9.90b of debt at December 2021, down from zł10.5b a year prior. But it also has zł10.1b in cash to offset that, meaning it has zł179.0m net cash.

A Look At PGE Polska Grupa Energetyczna's Liabilities

Zooming in on the latest balance sheet data, we can see that PGE Polska Grupa Energetyczna had liabilities of zł21.8b due within 12 months and liabilities of zł18.9b due beyond that. Offsetting this, it had zł10.1b in cash and zł5.08b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł25.5b.

Given this deficit is actually higher than the company's market capitalization of zł18.5b, we think shareholders really should watch PGE Polska Grupa Energetyczna's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that PGE Polska Grupa Energetyczna has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Better yet, PGE Polska Grupa Energetyczna grew its EBIT by 166% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine PGE Polska Grupa Energetyczna's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. PGE Polska Grupa Energetyczna 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. Over the most recent three years, PGE Polska Grupa Energetyczna recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

Although PGE Polska Grupa Energetyczna's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł179.0m. And it impressed us with its EBIT growth of 166% over the last year. So we are not troubled with PGE Polska Grupa Energetyczna'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. For example - PGE Polska Grupa Energetyczna has 1 warning sign we think you should be aware of.

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.