These 4 metrics indicate that WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji (WSE:WOD) is using debt extensively

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji SA (WSE:WOD) is in debt. But the more important question is: what risk does this debt create?

What risk does debt carry?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji

What is the debt of WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji?

As you can see below, at the end of December 2021, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji had a debt of 19.3 million zł, compared to 10.8 million zł a year ago. Click on the image for more details. On the other hand, it has 9.94 million zł of liquid assets, which results in a net debt of approximately 9.32 million zł.

WSE:WOD Debt to Equity April 13, 2022

How healthy is WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji’s balance sheet?

The latest balance sheet data shows that WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji had liabilities of zł 4.91 million due within the year, and liabilities of zł 74.3 million falling due thereafter. On the other hand, he had cash of 9.94 million zł and 2.29 million zł of receivables due within the year. Thus, its liabilities total 67.0 million zł more than the combination of its cash and short-term receivables.

Since this deficit is actually greater than the company’s market capitalization of zł 48.4 million, we believe that shareholders should really watch WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji’s debt level, like a parent watching his child riding a bicycle for the first time. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price.

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). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji has a low net debt to EBITDA ratio of only 0.89. And its EBIT covers its interest charges 10.7 times more. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. But the bad news is that WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji has seen its EBIT fall by 12% over the last twelve months. We believe that this type of performance, if repeated frequently, could well spell trouble for the stock. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji will need income to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji has spent a lot of money. While this may be the result of spending for growth, it makes debt much riskier.

Our point of view

At first glance, the level of WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji’s total liabilities left us hesitant about the stock, and its EBIT to free cash flow conversion was no more appealing than the single empty restaurant on the darkest night. busy year. But at least it’s decent enough to cover its interest costs with its EBIT; it’s encouraging. It should also be noted that WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji belongs to the water services sector, which is often considered rather defensive. Overall, it seems to us that the balance sheet of WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji really represents a significant risk for the company. We are therefore almost as wary of this stock as a hungry kitten of falling into its owner’s fish pond: once bitten, twice shy, as they say. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 3 warning signs we spotted with WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji (including 1 that is potentially serious).

If you are interested in investing in businesses that can generate profits without the burden of debt, then 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 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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