Does Koncar - distributivni i specijalni transformatori d.d (ZGSE:KODT) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Koncar - distributivni i specijalni transformatori d.d. (ZGSE:KODT) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Koncar - distributivni i specijalni transformatori d.d

What Is Koncar - distributivni i specijalni transformatori d.d's Debt?

As you can see below, at the end of December 2020, Koncar - distributivni i specijalni transformatori d.d had Kn64.8m of debt, up from Kn59.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds Kn111.6m in cash, so it actually has Kn46.8m net cash.

How Healthy Is Koncar - distributivni i specijalni transformatori d.d's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Koncar - distributivni i specijalni transformatori d.d had liabilities of Kn283.5m due within 12 months and liabilities of Kn156.1m due beyond that. On the other hand, it had cash of Kn111.6m and Kn153.8m worth of receivables due within a year. So its liabilities total Kn174.2m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Koncar - distributivni i specijalni transformatori d.d is worth Kn864.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Koncar - distributivni i specijalni transformatori d.d boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Koncar - distributivni i specijalni transformatori d.d grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Koncar - distributivni i specijalni transformatori 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Koncar - distributivni i specijalni transformatori 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, Koncar - distributivni i specijalni transformatori d.d created free cash flow amounting to 18% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

Although Koncar - distributivni i specijalni transformatori 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 Kn46.8m. And we liked the look of last year's 49% year-on-year EBIT growth. So we are not troubled with Koncar - distributivni i specijalni transformatori d.d's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Koncar - distributivni i specijalni transformatori d.d you should be aware of.

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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