PGE Polska Grupa Energetyczna (WSE:PGE) Has A Pretty 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. Importantly, PGE Polska Grupa Energetyczna S.A. (WSE:PGE) 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for PGE Polska Grupa Energetyczna

How Much Debt Does PGE Polska Grupa Energetyczna Carry?

You can click the graphic below for the historical numbers, but it shows that PGE Polska Grupa Energetyczna had zł8.26b of debt in September 2022, down from zł9.75b, one year before. But it also has zł13.7b in cash to offset that, meaning it has zł5.46b net cash.

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

We can see from the most recent balance sheet that PGE Polska Grupa Energetyczna had liabilities of zł25.1b falling due within a year, and liabilities of zł16.5b due beyond that. Offsetting this, it had zł13.7b in cash and zł6.79b in receivables that were due within 12 months. So it has liabilities totalling zł21.0b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's zł15.5b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. PGE Polska Grupa Energetyczna boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

On top of that, PGE Polska Grupa Energetyczna grew its EBIT by 30% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if PGE Polska Grupa Energetyczna can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While PGE Polska Grupa Energetyczna 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. Over the last three years, PGE Polska Grupa Energetyczna recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While PGE Polska Grupa Energetyczna does have more liabilities than liquid assets, it also has net cash of zł5.46b. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in zł2.9b. So we don't have any problem with PGE Polska Grupa Energetyczna's use of debt. 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. Case in point: We've spotted 2 warning signs for PGE Polska Grupa Energetyczna you should be aware of, and 1 of them doesn't sit too well with us.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.