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.' 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 Adris grupa d. d. (ZGSE:ADRS) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, 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 Kn1.66b of debt at March 2021, down from Kn1.76b a year prior. But it also has Kn2.33b in cash to offset that, meaning it has Kn666.5m net cash.
How Strong Is Adris grupa d. d's Balance Sheet?
According to the last reported balance sheet, Adris grupa d. d had liabilities of Kn4.44b due within 12 months, and liabilities of Kn7.18b due beyond 12 months. Offsetting this, it had Kn2.33b in cash and Kn1.81b in receivables that were due within 12 months. So its liabilities total Kn7.49b more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's Kn6.83b 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. Adris grupa d. d boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
Importantly, Adris grupa d. d's EBIT fell a jaw-dropping 91% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Adris grupa d. d's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Adris grupa d. d 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 most recent three years, Adris grupa d. d recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
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 Kn666.5m. And it impressed us with free cash flow of -Kn395m, being 71% of its EBIT. Despite its cash we think that Adris grupa d. d seems to struggle to grow its EBIT, so we are wary of the stock. 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. To that end, you should be aware of the 1 warning sign we've spotted with Adris grupa d. d .
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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About ZGSE:ADRS
Adris grupa d. d
Engages in the tourism, healthy food, insurance, and real estate businesses in Croatia and internationally.
Adequate balance sheet with moderate growth potential.
