We Think Stara Planina Hold (BUL:SPH) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Stara Planina Hold Plc (BUL:SPH) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Stara Planina Hold

What Is Stara Planina Hold's Debt?

As you can see below, at the end of September 2022, Stara Planina Hold had лв4.11m of debt, up from лв3.88m a year ago. Click the image for more detail. However, its balance sheet shows it holds лв37.8m in cash, so it actually has лв33.7m net cash.

A Look At Stara Planina Hold's Liabilities

According to the last reported balance sheet, Stara Planina Hold had liabilities of лв54.1m due within 12 months, and liabilities of лв7.02m due beyond 12 months. On the other hand, it had cash of лв37.8m and лв53.1m worth of receivables due within a year. So it actually has лв29.7m 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. Simply put, the fact that Stara Planina Hold has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Stara Planina Hold has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Stara Planina Hold will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept 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. Looking at the most recent three years, Stara Planina Hold recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Stara Planina Hold has net cash of лв33.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 29% year-on-year EBIT growth. So is Stara Planina Hold'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. For example - Stara Planina Hold has 1 warning sign we think 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.