Is AD Plastik d.d (ZGSE:ADPL) Using Too Much Debt?

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.' 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 can see that AD Plastik d.d. (ZGSE:ADPL) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 AD Plastik d.d

How Much Debt Does AD Plastik d.d Carry?

The image below, which you can click on for greater detail, shows that at September 2024 AD Plastik d.d had debt of €50.9m, up from €47.7m in one year. However, it also had €3.52m in cash, and so its net debt is €47.4m.

A Look At AD Plastik d.d's Liabilities

Zooming in on the latest balance sheet data, we can see that AD Plastik d.d had liabilities of €60.8m due within 12 months and liabilities of €23.9m due beyond that. On the other hand, it had cash of €3.52m and €27.4m worth of receivables due within a year. So it has liabilities totalling €53.7m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €45.1m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AD Plastik d.d'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.

In the last year AD Plastik d.d wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to €141m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, AD Plastik d.d had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €4.0m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of €4.6m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for AD Plastik d.d (2 are significant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.