Does Korado-Bulgaria AD (BUL:KBG) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Korado-Bulgaria AD (BUL:KBG) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Korado-Bulgaria AD

What Is Korado-Bulgaria AD's Debt?

The chart below, which you can click on for greater detail, shows that Korado-Bulgaria AD had лв3.72m in debt in December 2020; about the same as the year before. However, because it has a cash reserve of лв3.62m, its net debt is less, at about лв96.0k.

A Look At Korado-Bulgaria AD's Liabilities

We can see from the most recent balance sheet that Korado-Bulgaria AD had liabilities of лв7.39m falling due within a year, and liabilities of лв696.0k due beyond that. Offsetting these obligations, it had cash of лв3.62m as well as receivables valued at лв6.29m due within 12 months. So it actually has лв1.82m more liquid assets than total liabilities.

This surplus suggests that Korado-Bulgaria AD has a conservative balance sheet, and could probably eliminate its debt without much difficulty. But either way, Korado-Bulgaria AD has virtually no net debt, so it's fair to say it does not have a heavy debt load!

Fortunately, Korado-Bulgaria AD grew its EBIT by 7.1% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Korado-Bulgaria AD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Korado-Bulgaria AD generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

The good news is that Korado-Bulgaria AD's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Considering this range of factors, it seems to us that Korado-Bulgaria AD is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Korado-Bulgaria AD that you should be aware of before investing here.

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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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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