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

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. We can see that PGE Polska Grupa Energetyczna S.A. (WSE:PGE) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for PGE Polska Grupa Energetyczna

What Is PGE Polska Grupa Energetyczna's Debt?

As you can see below, at the end of March 2024, PGE Polska Grupa Energetyczna had zł16.4b of debt, up from zł13.4b a year ago. Click the image for more detail. However, because it has a cash reserve of zł5.01b, its net debt is less, at about zł11.4b.

How Strong Is PGE Polska Grupa Energetyczna's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PGE Polska Grupa Energetyczna had liabilities of zł47.4b due within 12 months and liabilities of zł23.8b due beyond that. On the other hand, it had cash of zł5.01b and zł10.5b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł55.6b.

This deficit casts a shadow over the zł16.1b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, PGE Polska Grupa Energetyczna would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

PGE Polska Grupa Energetyczna has a low debt to EBITDA ratio of only 1.2. And remarkably, despite having net debt, it actually received more in interest over the last twelve months than it had to pay. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. In addition to that, we're happy to report that PGE Polska Grupa Energetyczna has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, PGE Polska Grupa Energetyczna recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

While PGE Polska Grupa Energetyczna's level of total liabilities has us nervous. For example, its interest cover and EBIT growth rate give us some confidence in its ability to manage its debt. It's also worth noting that PGE Polska Grupa Energetyczna is in the Electric Utilities industry, which is often considered to be quite defensive. When we consider all the factors discussed, it seems to us that PGE Polska Grupa Energetyczna is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. Even though PGE Polska Grupa Energetyczna lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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