These 4 Measures Indicate That WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji (WSE:WOD) Is Using Debt Extensively

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji S.A. (WSE:WOD) does use debt in its business. But the real question is whether this debt is making the company risky.

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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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji Carry?

As you can see below, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji had zł14.8m of debt, at June 2025, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of zł9.41m, its net debt is less, at about zł5.38m.

A Look At WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji's Liabilities

We can see from the most recent balance sheet that WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji had liabilities of zł8.28m falling due within a year, and liabilities of zł68.6m due beyond that. Offsetting this, it had zł9.41m in cash and zł4.71m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł62.7m.

The deficiency here weighs heavily on the zł39.2m 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, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji would probably need a major re-capitalization if its creditors were to demand repayment.

See our latest analysis for WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji has a low net debt to EBITDA ratio of only 0.59. And its EBIT covers its interest expense a whopping 10.0 times over. So we're pretty relaxed about its super-conservative use of debt. It is just as well that WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji's load is not too heavy, because its EBIT was down 74% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji reported free cash flow worth 18% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

On the face of it, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its interest cover is a good sign, and makes us more optimistic. We should also note that Water Utilities industry companies like WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji commonly do use debt without problems. Overall, it seems to us that WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

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.