We Think WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji (WSE:WOD) Can Stay On Top Of Its Debt

Warren Buffett famously said, '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. 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.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji

How Much Debt Does WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji Carry?

As you can see below, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji had zł15.3m of debt at June 2024, down from zł16.9m a year prior. However, it also had zł9.19m in cash, and so its net debt is zł6.10m.

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 zł8.20m falling due within a year, and liabilities of zł69.6m due beyond that. Offsetting this, it had zł9.19m in cash and zł4.26m in receivables that were due within 12 months. So it has liabilities totalling zł64.3m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the zł36.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji's net debt is only 0.52 times its EBITDA. And its EBIT easily covers its interest expense, being 21.6 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In addition to that, we're happy to report that WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji has boosted its EBIT by 81%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji 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.

Our View

WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its level of total liabilities has the opposite effect. We would also note that Water Utilities industry companies like WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji commonly do use debt without problems. Looking at all the aforementioned factors together, it strikes us that WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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. For instance, we've identified 3 warning signs for WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.