Does Ðuro Ðakovic Grupa d.d (ZGSE:DDJH) Have A Healthy Balance Sheet?

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.' 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. Importantly, Ðuro Ðakovic Grupa d.d. (ZGSE:DDJH) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ðuro Ðakovic Grupa d.d

What Is Ðuro Ðakovic Grupa d.d's Net Debt?

The chart below, which you can click on for greater detail, shows that Ðuro Ðakovic Grupa d.d had €16.1m in debt in September 2024; about the same as the year before. However, because it has a cash reserve of €1.69m, its net debt is less, at about €14.4m.

How Healthy Is Ðuro Ðakovic Grupa d.d's Balance Sheet?

We can see from the most recent balance sheet that Ðuro Ðakovic Grupa d.d had liabilities of €48.1m falling due within a year, and liabilities of €22.3m due beyond that. Offsetting this, it had €1.69m in cash and €14.7m in receivables that were due within 12 months. So it has liabilities totalling €54.0m more than its cash and near-term receivables, combined.

Given Ðuro Ðakovic Grupa d.d has a market capitalization of €498.1m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ðuro Ðakovic 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.

In the last year Ðuro Ðakovic Grupa d.d wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to €109m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Ðuro Ðakovic Grupa d.d produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €3.1m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of €32m and a profit of €4.4m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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 example, we've discovered 2 warning signs for Ðuro Ðakovic Grupa d.d that you should be aware of before investing here.

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.