These 4 metrics indicate that Krynicki Recykling Spólka Akcyjna (WSE:KRC) is using debt safely
Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Krynicki Recykling Spolka Akcyjna (WSE:KRC) uses debt in its business. But should shareholders worry about its use of debt?
When is debt a problem?
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. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest review for Krynicki Recykling Spólka Akcyjna
What is Krynicki Recykling Spólka Akcyjna’s debt?
The image below, which you can click on for more details, shows that in September 2021, Krynicki Recykling Spólka Akcyjna had a debt of 61.5 million zł, compared to 49.7 million zł in one year. However, he has zł14.9 million of cash to offset this, resulting in a net debt of approximately zł46.6 million.
A look at the responsibilities of Krynicki Recykling Spólka Akcyjna
According to the latest published balance sheet, Krynicki Recykling Spólka Akcyjna had debts of 36.7 million zł due within 12 months and debts of 101.6 million zł due beyond 12 months. In return, it had zł 14.9 million in cash and zł 20.3 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of zł 103.1 million.
Krynicki Recykling Spólka Akcyjna has a market cap of 392.5 million zł, so it could most likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt.
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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Krynicki Recykling Spólka Akcyjna has a low net debt to EBITDA ratio of just 0.88. And its EBIT easily covers its interest costs, which is 16.4 times the size. So we’re pretty relaxed about his super-conservative use of debt. Even more impressive is the fact that Krynicki Recykling Spólka Akcyjna increased its EBIT by 249% year-over-year. If sustained, this growth will make debt even more manageable in years to come. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Krynicki Recykling Spólka Akcyjna that will influence the balance sheet in the future. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Finally, while the taxman may love accounting profits, lenders only accept cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Krynicki Recykling Spólka Akcyjna has generated free cash flow of a very strong 82% of its EBIT, more than expected. This puts him in a very strong position to repay his debt.
Our point of view
Krynicki Recykling Spólka Akcyjna’s interest cover suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. And the good news doesn’t stop there, since its conversion of EBIT into free cash flow also confirms this impression! Given this set of factors, it seems to us that Krynicki Recykling Spólka Akcyjna is quite cautious with its debt, and the risks seem well controlled. So we are not worried about using a little leverage on the balance sheet. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 4 warning signs for Krynicki Recykling Spólka Akcyjna you should be aware.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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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.