Is Adris grupa d. d (ZGSE:ADRS) A Risky Investment?

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. We can see that Adris grupa d. d. (ZGSE:ADRS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Adris grupa d. d

How Much Debt Does Adris grupa d. d Carry?

You can click the graphic below for the historical numbers, but it shows that Adris grupa d. d had Kn1.91b of debt in September 2022, down from Kn2.07b, one year before. But on the other hand it also has Kn2.40b in cash, leading to a Kn488.8m net cash position.

A Look At Adris grupa d. d's Liabilities

According to the last reported balance sheet, Adris grupa d. d had liabilities of Kn4.66b due within 12 months, and liabilities of Kn7.54b due beyond 12 months. On the other hand, it had cash of Kn2.40b and Kn2.46b worth of receivables due within a year. So its liabilities total Kn7.35b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of Kn6.88b, we think shareholders really should watch Adris grupa d. d's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Adris grupa d. d has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Also positive, Adris grupa d. d grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Adris grupa d. d will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Adris grupa d. d recorded free cash flow of 46% 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 Kn488.8m. And it impressed us with its EBIT growth of 27% over the last year. So we are not troubled with Adris grupa d. d's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Adris grupa d. d is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.