These 4 Measures Indicate That PGE Polska Grupa Energetyczna (WSE:PGE) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that PGE Polska Grupa Energetyczna S.A. (WSE:PGE) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for PGE Polska Grupa Energetyczna

What Is PGE Polska Grupa Energetyczna's Net Debt?

The image below, which you can click on for greater detail, shows that PGE Polska Grupa Energetyczna had debt of zł9.88b at the end of June 2022, a reduction from zł10.3b over a year. But on the other hand it also has zł11.0b in cash, leading to a zł1.07b net cash position.

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

The latest balance sheet data shows that PGE Polska Grupa Energetyczna had liabilities of zł21.5b due within a year, and liabilities of zł16.3b falling due after that. Offsetting these obligations, it had cash of zł11.0b as well as receivables valued at zł8.04b due within 12 months. So it has liabilities totalling zł18.8b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of zł15.5b, 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. 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 47% over the last twelve months, and that growth will make it easier to handle its debt. 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 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. 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 last three years, PGE Polska Grupa Energetyczna recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

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 zł1.07b. And it impressed us with free cash flow of zł4.8b, being 81% of its EBIT. 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. Be aware that PGE Polska Grupa Energetyczna is showing 1 warning sign in our investment analysis , you should know about...

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.