Neochim AD (BUL:NEOH) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Neochim AD (BUL:NEOH) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Neochim AD

What Is Neochim AD's Debt?

The image below, which you can click on for greater detail, shows that Neochim AD had debt of лв5.37m at the end of December 2020, a reduction from лв20.4m over a year. But on the other hand it also has лв18.7m in cash, leading to a лв13.3m net cash position.

A Look At Neochim AD's Liabilities

Zooming in on the latest balance sheet data, we can see that Neochim AD had liabilities of лв20.4m due within 12 months and liabilities of лв6.63m due beyond that. On the other hand, it had cash of лв18.7m and лв6.81m worth of receivables due within a year. So its liabilities total лв1.53m more than the combination of its cash and short-term receivables.

Since publicly traded Neochim AD shares are worth a total of лв68.3m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Neochim AD also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Neochim AD made a loss at the EBIT level, last year, it was also good to see that it generated лв17m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Neochim AD 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. Neochim 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. Over the last year, Neochim AD actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Neochim AD's liabilities, but we can be reassured by the fact it has has net cash of лв13.3m. And it impressed us with free cash flow of лв31m, being 179% of its EBIT. So is Neochim AD'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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Neochim AD that you should be aware of before investing here.

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. 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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