Koncar - distributivni i specijalni transformatori d.d (ZGSE:KODT) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Koncar - distributivni i specijalni transformatori d.d. (ZGSE:KODT) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Koncar - distributivni i specijalni transformatori d.d had €8.17m of debt, an increase on €5.71m, over one year. But it also has €152.4m in cash to offset that, meaning it has €144.3m net cash.

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

The latest balance sheet data shows that Koncar - distributivni i specijalni transformatori d.d had liabilities of €191.5m due within a year, and liabilities of €22.6m falling due after that. Offsetting these obligations, it had cash of €152.4m as well as receivables valued at €94.8m due within 12 months. So it can boast €33.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Koncar - distributivni i specijalni transformatori d.d could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Koncar - distributivni i specijalni transformatori d.d has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Koncar - distributivni i specijalni transformatori d.d grew its EBIT by 186% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Koncar - distributivni i specijalni transformatori d.d will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Koncar - distributivni i specijalni transformatori d.d has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Koncar - distributivni i specijalni transformatori d.d generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Koncar - distributivni i specijalni transformatori d.d has €144.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in €143m. So is Koncar - distributivni i specijalni transformatori d.d's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Koncar - distributivni i specijalni transformatori d.d, you may well want to click here to check an interactive graph of its earnings per share history.

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.