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.' 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. Importantly, Stara Planina Hold Plc (BUL:SPH) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Stara Planina Hold
What Is Stara Planina Hold's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Stara Planina Hold had лв3.82m of debt in June 2021, down from лв4.54m, one year before. But on the other hand it also has лв45.3m in cash, leading to a лв41.5m net cash position.
How Healthy Is Stara Planina Hold's Balance Sheet?
The latest balance sheet data shows that Stara Planina Hold had liabilities of лв51.6m due within a year, and liabilities of лв6.68m falling due after that. Offsetting these obligations, it had cash of лв45.3m as well as receivables valued at лв40.8m due within 12 months. So it can boast лв27.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Stara Planina Hold could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Stara Planina Hold boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Stara Planina Hold grew its EBIT by 95% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Stara Planina Hold's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Stara Planina Hold 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. During the last three years, Stara Planina Hold produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Stara Planina Hold has net cash of лв41.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 95% over the last year. So is Stara Planina Hold's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Stara Planina Hold that you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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About BUL:SPH
Flawless balance sheet with questionable track record.
