We Think PGE Polska Grupa Energetyczna (WSE:PGE) Is Taking Some Risk With Its Debt

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.' 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 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?

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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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is PGE Polska Grupa Energetyczna's Debt?

The image below, which you can click on for greater detail, shows that at June 2025 PGE Polska Grupa Energetyczna had debt of zł11.0b, up from zł10.0b in one year. But it also has zł14.3b in cash to offset that, meaning it has zł3.30b net cash.

A Look At PGE Polska Grupa Energetyczna's Liabilities

According to the last reported balance sheet, PGE Polska Grupa Energetyczna had liabilities of zł32.4b due within 12 months, and liabilities of zł28.6b due beyond 12 months. Offsetting this, it had zł14.3b in cash and zł6.72b in receivables that were due within 12 months. So it has liabilities totalling zł39.9b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the zł24.0b 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. 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.

See our latest analysis for PGE Polska Grupa Energetyczna

Better yet, PGE Polska Grupa Energetyczna grew its EBIT by 130% 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 ultimately the future profitability of the business will decide if PGE Polska Grupa Energetyczna can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, PGE Polska Grupa Energetyczna's free cash flow amounted to 24% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 zł3.30b. And it impressed us with its EBIT growth of 130% over the last year. So while PGE Polska Grupa Energetyczna does not have a great balance sheet, it's certainly not too bad. 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.