Is Zespól Elektrowni Patnów-Adamów-Konin (WSE:ZEP) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Zespól Elektrowni Patnów-Adamów-Konin S.A. (WSE:ZEP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zespól Elektrowni Patnów-Adamów-Konin

What Is Zespól Elektrowni Patnów-Adamów-Konin's Net Debt?

As you can see below, at the end of June 2021, Zespól Elektrowni Patnów-Adamów-Konin had zł259.9m of debt, up from zł74.3m a year ago. Click the image for more detail. On the flip side, it has zł85.0m in cash leading to net debt of about zł174.9m.

How Strong Is Zespól Elektrowni Patnów-Adamów-Konin's Balance Sheet?

According to the last reported balance sheet, Zespól Elektrowni Patnów-Adamów-Konin had liabilities of zł830.8m due within 12 months, and liabilities of zł1.00b due beyond 12 months. On the other hand, it had cash of zł85.0m and zł586.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł1.16b.

Given this deficit is actually higher than the company's market capitalization of zł828.4m, we think shareholders really should watch Zespól Elektrowni Patnów-Adamów-Konin'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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zespól Elektrowni Patnów-Adamów-Konin'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.

Over 12 months, Zespól Elektrowni Patnów-Adamów-Konin made a loss at the EBIT level, and saw its revenue drop to zł1.9b, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

While Zespól Elektrowni Patnów-Adamów-Konin's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping zł245m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of zł301m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Zespól Elektrowni Patnów-Adamów-Konin (of which 2 shouldn't be ignored!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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