We Think Stara Planina Hold (BUL:5SR) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Stara Planina Hold Plc (BUL:5SR) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Stara Planina Hold

How Much Debt Does Stara Planina Hold Carry?

The image below, which you can click on for greater detail, shows that Stara Planina Hold had debt of лв4.53m at the end of September 2020, a reduction from лв4.97m over a year. But on the other hand it also has лв28.3m in cash, leading to a лв23.8m net cash position.

How Healthy Is Stara Planina Hold's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Stara Planina Hold had liabilities of лв32.6m due within 12 months and liabilities of лв5.82m due beyond that. On the other hand, it had cash of лв28.3m and лв26.5m worth of receivables due within a year. So it can boast лв16.4m more liquid assets than total liabilities.

This surplus suggests that Stara Planina Hold has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Stara Planina Hold boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Stara Planina Hold's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Stara Planina Hold will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Stara Planina Hold has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Stara Planina Hold's free cash flow amounted to 42% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Stara Planina Hold has net cash of лв23.8m, as well as more liquid assets than liabilities. So we are not troubled with Stara Planina Hold's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. 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 Stara Planina Hold (including 1 which is a bit concerning) .

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. 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.
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