Does KONCAR - Elektroindustrija d.d (ZGSE:KOEI) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that KONCAR - Elektroindustrija d.d. (ZGSE:KOEI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 - Elektroindustrija d.d

What Is KONCAR - Elektroindustrija d.d's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 KONCAR - Elektroindustrija d.d had €68.8m of debt, an increase on €60.6m, over one year. However, it does have €82.9m in cash offsetting this, leading to net cash of €14.1m.

A Look At KONCAR - Elektroindustrija d.d's Liabilities

Zooming in on the latest balance sheet data, we can see that KONCAR - Elektroindustrija d.d had liabilities of €320.3m due within 12 months and liabilities of €46.2m due beyond that. Offsetting this, it had €82.9m in cash and €243.9m in receivables that were due within 12 months. So its liabilities total €39.8m more than the combination of its cash and short-term receivables.

Given KONCAR - Elektroindustrija d.d has a market capitalization of €445.6m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, KONCAR - Elektroindustrija d.d also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that KONCAR - Elektroindustrija d.d grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since KONCAR - Elektroindustrija 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, a company can only pay off debt with cold hard cash, not accounting profits. KONCAR - Elektroindustrija 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. During the last three years, KONCAR - Elektroindustrija d.d burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about KONCAR - Elektroindustrija d.d's liabilities, but we can be reassured by the fact it has has net cash of €14.1m. And it impressed us with its EBIT growth of 15% over the last year. So we are not troubled with KONCAR - Elektroindustrija d.d's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - KONCAR - Elektroindustrija d.d has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.