Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Jastrzebska Spólka Weglowa S.A. (WSE:JSW) 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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Jastrzebska Spólka Weglowa
As you can see below, Jastrzebska Spólka Weglowa had zł1.72b of debt at June 2022, down from zł2.13b a year prior. However, it does have zł4.55b in cash offsetting this, leading to net cash of zł2.83b.
We can see from the most recent balance sheet that Jastrzebska Spólka Weglowa had liabilities of zł5.72b falling due within a year, and liabilities of zł3.28b due beyond that. On the other hand, it had cash of zł4.55b and zł2.71b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł1.74b.
This deficit isn't so bad because Jastrzebska Spólka Weglowa is worth zł3.97b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Jastrzebska Spólka Weglowa boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Jastrzebska Spólka Weglowa made a loss at the EBIT level, last year, it was also good to see that it generated zł7.2b in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jastrzebska Spólka Weglowa's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jastrzebska Spólka Weglowa may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Jastrzebska Spólka Weglowa produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While Jastrzebska Spólka Weglowa does have more liabilities than liquid assets, it also has net cash of zł2.83b. And it impressed us with free cash flow of zł5.1b, being 71% of its EBIT. So we are not troubled with Jastrzebska Spólka Weglowa's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Jastrzebska Spólka Weglowa (including 1 which shouldn't be ignored) .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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 Jastrzebska Spólka Weglowa 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.
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Jastrzebska Spólka Weglowa S.A. engages in the extraction, production, and sale of coal, coke, and hydrocarbons.
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.
Flawless balance sheet and fair 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.
Jastrzebska Spólka Weglowa S.A. engages in the extraction, production, and sale of coal, coke, and hydrocarbons.
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.
Flawless balance sheet and fair value.
Simply Wall Street Pty Ltd (ACN 600 056 611), is a Corporate Authorised Representative (Authorised Representative Number: 467183) of Sanlam Private Wealth Pty Ltd (AFSL No. 337927). Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situation or needs. You should not rely on any advice and/or information contained in this website and before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice. Please read our Financial Services Guide before deciding whether to obtain financial services from us.
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