We Think Koncar - distributivni i specijalni transformatori d.d (ZGSE:KODT) Can Stay On Top Of Its Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Koncar - distributivni i specijalni transformatori d.d. (ZGSE:KODT) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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?

The image below, which you can click on for greater detail, shows that at December 2022 Koncar - distributivni i specijalni transformatori d.d had debt of Kn177.9m, up from Kn59.5m in one year. However, because it has a cash reserve of Kn64.7m, its net debt is less, at about Kn113.3m.

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

We can see from the most recent balance sheet that Koncar - distributivni i specijalni transformatori d.d had liabilities of Kn653.6m falling due within a year, and liabilities of Kn107.8m due beyond that. Offsetting these obligations, it had cash of Kn64.7m as well as receivables valued at Kn348.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Kn348.7m.

Given Koncar - distributivni i specijalni transformatori d.d has a market capitalization of Kn2.16b, 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.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Koncar - distributivni i specijalni transformatori d.d has a low net debt to EBITDA ratio of only 0.55. And its EBIT covers its interest expense a whopping 253 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Koncar - distributivni i specijalni transformatori d.d grew its EBIT by 46% 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 ultimately the future profitability of the business will decide if Koncar - distributivni i specijalni transformatori d.d can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Koncar - distributivni i specijalni transformatori d.d recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

Koncar - distributivni i specijalni transformatori d.d's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. Looking at all the aforementioned factors together, it strikes us that Koncar - distributivni i specijalni transformatori d.d can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Koncar - distributivni i specijalni transformatori d.d (2 don't sit too well with us) 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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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.