Is AD Plastik d.d (ZGSE:ADPL) Using Debt In A Risky Way?

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 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. Importantly, AD Plastik d.d. (ZGSE:ADPL) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for AD Plastik d.d

What Is AD Plastik d.d's Debt?

The image below, which you can click on for greater detail, shows that AD Plastik d.d had debt of Kn315.3m at the end of December 2022, a reduction from Kn389.0m over a year. On the flip side, it has Kn30.5m in cash leading to net debt of about Kn284.8m.

How Healthy Is AD Plastik d.d's Balance Sheet?

The latest balance sheet data shows that AD Plastik d.d had liabilities of Kn388.7m due within a year, and liabilities of Kn192.4m falling due after that. On the other hand, it had cash of Kn30.5m and Kn143.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Kn407.6m.

This is a mountain of leverage relative to its market capitalization of Kn450.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AD Plastik d.d can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, AD Plastik d.d made a loss at the EBIT level, and saw its revenue drop to Kn811m, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

Not only did AD Plastik d.d's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable Kn127m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of Kn80m into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that AD Plastik d.d is showing 2 warning signs in our investment analysis , you should know about...

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.