Does Zarneni Hrani Bulgaria AD (BUL:ZHBG) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Zarneni Hrani Bulgaria AD (BUL:ZHBG) does have debt on its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zarneni Hrani Bulgaria AD

What Is Zarneni Hrani Bulgaria AD's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Zarneni Hrani Bulgaria AD had лв33.6m of debt in December 2020, down from лв38.3m, one year before. But it also has лв39.3m in cash to offset that, meaning it has лв5.66m net cash.

How Strong Is Zarneni Hrani Bulgaria AD's Balance Sheet?

The latest balance sheet data shows that Zarneni Hrani Bulgaria AD had liabilities of лв50.0m due within a year, and liabilities of лв43.4m falling due after that. On the other hand, it had cash of лв39.3m and лв58.8m worth of receivables due within a year. So it can boast лв4.68m more liquid assets than total liabilities.

This surplus suggests that Zarneni Hrani Bulgaria AD is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Zarneni Hrani Bulgaria AD boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Zarneni Hrani Bulgaria AD if management cannot prevent a repeat of the 38% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Zarneni Hrani Bulgaria AD'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. Zarneni Hrani 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. Happily for any shareholders, Zarneni Hrani Bulgaria AD actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Zarneni Hrani Bulgaria AD has net cash of лв5.66m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of лв2.8m, being 196% of its EBIT. So we don't think Zarneni Hrani Bulgaria AD's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Zarneni Hrani Bulgaria AD you should be aware of, and 1 of them can't be ignored.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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