Does Grupa RECYKL (WSE:GRC) have a healthy balance sheet?

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies RECYKL Group SA (WSE:GRC) uses debt. But the real question is whether this debt makes the business risky.

When is debt a problem?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first look at cash and debt together.

Discover our latest analysis for Grupa RECYKL

What is Grupa RECYKL’s debt?

The image below, which you can click on for more details, shows that Grupa RECYKL had a debt of 33.5 million zł at the end of September 2021, a reduction from 38.0 million zł year-on-year. However, he has 5.74 million zł of cash to offset this, resulting in a net debt of approximately 27.8 million zł.

WSE: GRC Debt to Equity History 22 January 2022

How healthy is Grupa RECYKL’s balance sheet?

We can see from the most recent balance sheet that Grupa RECYKL had liabilities of 28.6 million zł due in one year, and liabilities of 67.3 million zł due beyond. In return, he had 5.74 million zł in cash and 19.3 million zł in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by 70.9 million zł.

This deficit is considerable compared to its market capitalization of zł 104.1 million, so it suggests that shareholders monitor the use of debt by Grupa RECYKL. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Grupa RECYKL has a low net debt to EBITDA ratio of only 1.2. And its EBIT covers its interest charges 11.1 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. In addition, Grupa RECYKL has increased its EBIT by 94% over the last twelve months, and this growth will facilitate its debt management. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Grupa RECYKL that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Grupa RECYKL has recorded substantial negative free cash flow, in total. While this may be the result of spending for growth, it makes debt much riskier.

Our point of view

Based on what we’ve seen, Grupa RECYKL doesn’t find it easy, given its EBIT to free cash flow conversion, but the other factors we’ve considered give us cause for optimism. There is no doubt that its ability to grow its EBIT is quite meteoric. Examination of all this data makes us a little cautious about Grupa RECYKL’s level of indebtedness. While we understand that debt can improve returns on equity, we suggest shareholders keep a close eye on their level of debt, lest it increase. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Grupa RECYKL you should know.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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