These 4 Measures Indicate That Koncar - distributivni i specijalni transformatori d.d (ZGSE:KODT) Is Using Debt Reasonably Well

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 note that Koncar - distributivni i specijalni transformatori d.d. (ZGSE:KODT) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

The image below, which you can click on for greater detail, shows that at September 2020 Koncar - distributivni i specijalni transformatori d.d had debt of Kn82.6m, up from Kn67.1m in one year. But on the other hand it also has Kn114.8m in cash, leading to a Kn32.3m net cash position.

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 Kn334.4m due within a year, and liabilities of Kn193.1m falling due after that. Offsetting this, it had Kn114.8m in cash and Kn179.4m in receivables that were due within 12 months. So its liabilities total Kn233.2m more than the combination of its cash and short-term receivables.

Koncar - distributivni i specijalni transformatori d.d has a market capitalization of Kn668.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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!

And we also note warmly that Koncar - distributivni i specijalni transformatori d.d grew its EBIT by 12% 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 Koncar - distributivni i specijalni transformatori d.d's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, Koncar - distributivni i specijalni transformatori d.d created free cash flow amounting to 4.5% 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 Kn32.3m. And it also grew its EBIT by 12% over the last year. So we are not troubled with Koncar - distributivni i specijalni transformatori 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 Koncar - distributivni i specijalni transformatori d.d is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.

If you’re looking to trade Koncar - distributivni i specijalni transformatori d.d, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.