Does Bumech (WSE:BMC) 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. We note that Bumech SA (WSE:BMC) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

When is debt a problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. 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. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Discover our latest analysis for Bumech

What is Bumech’s debt?

As you can see below, at the end of September 2021, Bumech had a debt of 110.1 million zł, compared to 5.61 million zł a year ago. Click on the image for more details. However, he also had 33.4 million zł of cash, and therefore his net debt is 76.6 million zł.

WSE: BMC Debt to Equity History February 18, 2022

A look at Bumech’s responsibilities

The latest balance sheet data shows that Bumech had liabilities of zł 306.5 million due within one year, and liabilities of zł 250.7 million falling due thereafter. In return, he had 33.4 million zł in cash and 77.5 million zł in receivables due within 12 months. Thus, its liabilities total 446.3 million zł more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the company of 270.8 million zł, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. After all, Bumech would likely need a major recapitalization if it had to pay its creditors today.

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.

Bumech’s net debt is only 0.80 times its EBITDA. And its EBIT easily covers its interest costs, being 12.0 times greater. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. It was also good to see that despite losing money on the EBIT line last year, Bumech turned things around in the last 12 months, delivering an EBIT of 77 million zł. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since Bumech 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 company can only repay its debts with cold hard cash, not with book profits. It is therefore important to check how much of its earnings before interest and taxes (EBIT) converts into actual free cash flow. Over the past year, Bumech has created free cash flow of 19% of its EBIT, an uninspiring performance. This low level of cash conversion compromises its ability to manage and repay its debt.

Our point of view

We would go so far as to say that the level of Bumech’s total liabilities was disappointing. But at least it’s decent enough to cover its interest costs with its EBIT; it’s encouraging. Overall, we think it’s fair to say that Bumech has enough debt that there are real risks around the balance sheet. If all goes well, this should boost returns, but on the other hand, the risk of permanent capital loss is increased by debt. 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. We have identified 4 warning signs with Bumech (at least 1 that cannot be ignored), and understanding them should be part of your investment process.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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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