Is Zarneni Hrani Bulgaria AD (BUL:ZHBG) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Zarneni Hrani Bulgaria AD (BUL:ZHBG) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out 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 as of December 2021 Zarneni Hrani Bulgaria AD had лв46.6m of debt, an increase on лв30.4m, over one year. However, it also had лв9.38m in cash, and so its net debt is лв37.2m.

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

We can see from the most recent balance sheet that Zarneni Hrani Bulgaria AD had liabilities of лв47.2m falling due within a year, and liabilities of лв57.2m due beyond that. On the other hand, it had cash of лв9.38m and лв104.8m worth of receivables due within a year. So it actually has лв9.83m more liquid assets than total liabilities.

This excess liquidity suggests that Zarneni Hrani Bulgaria AD is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Zarneni Hrani Bulgaria AD reported revenue of лв81m, which is a gain of 8.5%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Zarneni Hrani Bulgaria AD produced an earnings before interest and tax (EBIT) loss. Indeed, it lost лв2.3m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. And on top of that, it booked free cash flow of лв5.8m and profit of лв3.5m over the last year. So it seems too risky for our taste. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Zarneni Hrani Bulgaria AD that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.