Is Adris grupa d. d (ZGSE:ADRS) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Adris grupa d. d. (ZGSE:ADRS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

See our latest analysis for Adris grupa d. d

What Is Adris grupa d. d's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Adris grupa d. d had €240.8m of debt in September 2023, down from €253.5m, one year before. However, its balance sheet shows it holds €542.5m in cash, so it actually has €301.6m net cash.

How Healthy Is Adris grupa d. d's Balance Sheet?

We can see from the most recent balance sheet that Adris grupa d. d had liabilities of €526.5m falling due within a year, and liabilities of €827.2m due beyond that. Offsetting this, it had €542.5m in cash and €127.9m in receivables that were due within 12 months. So its liabilities total €683.4m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €1.03b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Adris grupa d. d also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Adris grupa d. d grew its EBIT by 14% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. In the last three years, Adris grupa d. d's free cash flow amounted to 32% of its EBIT, less 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 €301.6m. On top of that, it increased its EBIT by 14% in the last twelve months. So we don't have any problem with Adris grupa d. d's use of debt. 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. To that end, you should be aware of the 2 warning signs 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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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.