Asseco South Eastern Europe (WSE:ASE) appears to be using debt sparingly

Warren Buffett said: “Volatility is far from synonymous with risk. 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. Like many other companies Asseco South Eastern Europe SA (WSE:ASE) uses debt. But should shareholders worry about its use of debt?

When is debt dangerous?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for Asseco South Eastern Europe

What is Asseco South Eastern Europe’s debt?

The image below, which you can click on for more details, shows that Asseco South East Europe had a debt of 47.3 million zł at the end of September 2021, a reduction from 59.3 million zł over a year. However, he has 227.1 million zł of cash to compensate for this, resulting in a net cash of 179.7 million zł.

WSE: ASE Debt to Equity History March 21, 2022

A look at the liabilities of Asseco Europe South-East

According to the latest published balance sheet, Asseco South East Europe had liabilities of 290.3 million zł due within 12 months and liabilities of 91.4 million zł due beyond 12 months. As compensation for these obligations, it had cash of 227.1 million zł as well as receivables valued at 201.7 million zł, payable within 12 months. So he actually has 47.1 million zł Continued liquid assets than total liabilities.

Considering the size of Asseco South Eastern Europe, it seems that its liquid assets are well balanced in relation to its total liabilities. So, while it’s hard to imagine the zł2.65b company fighting for cash, we still think it’s worth watching its balance sheet. Simply put, the fact that Asseco Europe South East has more cash than debt is probably a good indication that it can safely manage its debt.

Another good sign, Asseco South Eastern Europe was able to increase its EBIT by 25% in twelve months, thus facilitating debt repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the future profitability of the business will decide whether Asseco South Eastern Europe can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

But our last consideration is also important, because a company cannot pay off its debts with paper profits; he needs cash. Asseco South Eastern Europe may have net cash on the balance sheet, but it is always interesting to see how well the business converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its needs and its ability to manage debt. Fortunately for all shareholders, Asseco South Eastern Europe has actually produced more free cash flow than EBIT over the past three years. There’s nothing better than cash coming in to stay in your lenders’ good books.

Abstract

While we sympathize with investors who find debt a concern, you should bear in mind that Asseco South East Europe has a net cash position of zł179.7 million, as well as more liquid assets than liabilities. The icing on the cake was that he converted 109% of this EBIT into free cash flow, which brought in 203 million zł. We therefore do not believe that the use of debt by Asseco South Eastern Europe is risky. Over time stock prices tend to follow earnings per share, so if you are interested in Asseco South East Europe you may wish to click here for an interactive graph of its earnings history per share.

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.

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.

Mary I. Bruner