PGE Polska Grupa Energetyczna (WSE:PGE) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 zł9.55b of debt in September 2024, down from zł12.9b, one year before. However, it does have zł9.85b in cash offsetting this, leading to net cash of zł307.0m.

A Look At PGE Polska Grupa Energetyczna's Liabilities

The latest balance sheet data shows that PGE Polska Grupa Energetyczna had liabilities of zł29.9b due within a year, and liabilities of zł24.2b falling due after that. Offsetting this, it had zł9.85b in cash and zł7.60b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł36.7b.

The deficiency here weighs heavily on the zł17.4b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, PGE Polska Grupa Energetyczna would probably need a major re-capitalization if its creditors were to demand repayment. 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 113% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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. Looking at the most recent three years, PGE Polska Grupa Energetyczna recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While PGE Polska Grupa Energetyczna does have more liabilities than liquid assets, it also has net cash of zł307.0m. And we liked the look of last year's 113% year-on-year EBIT growth. So we don't have any problem with PGE Polska Grupa Energetyczna's use of debt. While PGE Polska Grupa Energetyczna didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.