Adris grupa d. d (ZGSE:ADRS) Has A Pretty Healthy Balance Sheet

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

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Adris grupa d. d

What Is Adris grupa d. d's Debt?

As you can see below, Adris grupa d. d had €239.3m of debt at March 2023, down from €251.2m a year prior. But on the other hand it also has €312.6m in cash, leading to a €73.3m net cash position.

A Look At Adris grupa d. d's Liabilities

We can see from the most recent balance sheet that Adris grupa d. d had liabilities of €418.4m falling due within a year, and liabilities of €858.9m due beyond that. On the other hand, it had cash of €312.6m and €98.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €866.1m.

This deficit is considerable relative to its market capitalization of €1.02b, so it does suggest shareholders should keep an eye on Adris grupa d. d's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Adris grupa d. d boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Adris grupa d. d has increased its EBIT by 5.9% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Adris grupa 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Adris grupa d. d has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent two years, Adris grupa d. d recorded free cash flow of 25% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Adris grupa d. d's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €73.3m. And it also grew its EBIT by 5.9% over the last year. So we don't have any problem with Adris grupa d. d's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Adris grupa d. d has 1 warning sign we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.