Grodno Spólka Akcyjna (WSE: GRN) has a fairly healthy track record
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Grodno Spólka Akcyjna (WSE: GRN) uses debt in its business. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for Grodno Spólka Akcyjna
What is the debt of Grodno Spólka Akcyjna?
The image below, which you can click for more details, shows that in June 2021 Grodno Spólka Akcyjna had a debt of Z 54.0million, up from Z49.9million in one year. However, he also had Z 4.84million in cash, so his net debt is Z49.1million.
A look at the responsibilities of Grodno Spólka Akcyjna
Zooming in on the latest balance sheet data, we can see that Grodno Spólka Akcyjna had a liability of Z 271.8 million due within 12 months and a liability of Z 30.5 million due beyond. In compensation for these obligations, he had cash of 4.84 million z as well as receivables valued at 139.2 million z maturing within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by Z 158.3 million.
This deficit is substantial compared to his market cap of Z226.1million, so he suggests shareholders keep an eye on Grodno Spólka Akcyjna’s use of debt. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Grodno Spólka Akcyjna’s net debt / EBITDA ratio of around 1.7 suggests only moderate use of debt. And its strong coverage interest of 98.9 times, makes us even more comfortable. Unfortunately, Grodno Spólka Akcyjna’s EBIT actually fell 5.0% last year. If this earnings trend continues, its debt load will rise like the heart of a polar bear watching its only cub. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in isolation; since Grodno Spólka Akcyjna will need income to repay this debt. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Grodno Spólka Akcyjna has recorded free cash flow of 71% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
Based on our analysis, Grodno Spólka Akcyjna’s interest coverage should indicate that it will not have too many problems with its debt. However, our other observations were not so encouraging. For example, it looks like he has to struggle a bit to manage his total liabilities. When we consider all of the factors mentioned above, we feel a little cautious about Grodno Spólka Akcyjna’s use of debt. While we understand that debt can improve returns on equity, we suggest shareholders watch their debt level closely, lest they increase. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 2 warning signs for Grodno Spólka Akcyjna that you need to be aware of.
If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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