The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We note that Monnari Trade S.A. (WSE:MON) does have debt on its balance sheet. But is this debt a concern to shareholders?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Monnari Trade
The image below, which you can click on for greater detail, shows that Monnari Trade had debt of zł14.4m at the end of June 2022, a reduction from zł25.3m over a year. But it also has zł97.7m in cash to offset that, meaning it has zł83.3m net cash.
We can see from the most recent balance sheet that Monnari Trade had liabilities of zł97.2m falling due within a year, and liabilities of zł12.5m due beyond that. Offsetting these obligations, it had cash of zł97.7m as well as receivables valued at zł26.3m due within 12 months. So it actually has zł14.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Monnari Trade could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Monnari Trade boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Monnari Trade grew its EBIT by 533% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Monnari Trade will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Monnari Trade has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Monnari Trade actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While we empathize with investors who find debt concerning, you should keep in mind that Monnari Trade has net cash of zł83.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 167% of that EBIT to free cash flow, bringing in zł34m. So is Monnari Trade's debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 3 warning signs we've spotted with Monnari Trade (including 1 which is a bit unpleasant) .
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.
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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.
Find out whether Monnari Trade is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
Monnari Trade S.A. engages in the design, outsourced production, marketing, and sale of clothing products and accessories for women in Poland and internationally.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Excellent balance sheet and good value.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
Monnari Trade S.A. engages in the design, outsourced production, marketing, and sale of clothing products and accessories for women in Poland and internationally.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Excellent balance sheet and good value.
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