These 4 Measures Indicate That Korado-Bulgaria AD (BUL:4KX) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Korado-Bulgaria AD (BUL:4KX) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Korado-Bulgaria AD

What Is Korado-Bulgaria AD's Debt?

As you can see below, Korado-Bulgaria AD had лв3.72m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has лв4.01m in cash, leading to a лв292.0k net cash position.

A Look At Korado-Bulgaria AD's Liabilities

We can see from the most recent balance sheet that Korado-Bulgaria AD had liabilities of лв4.76m falling due within a year, and liabilities of лв4.34m due beyond that. Offsetting these obligations, it had cash of лв4.01m as well as receivables valued at лв7.54m due within 12 months. So it actually has лв2.44m more liquid assets than total liabilities.

This short term liquidity is a sign that Korado-Bulgaria AD could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Korado-Bulgaria AD has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Korado-Bulgaria AD saw its EBIT decline by 7.4% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Korado-Bulgaria AD'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. Korado-Bulgaria AD 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. Over the last three years, Korado-Bulgaria AD recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Korado-Bulgaria AD has лв292.0k in net cash and a decent-looking balance sheet. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in лв5.2m. So is Korado-Bulgaria AD'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. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Korado-Bulgaria AD you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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