Is KONCAR - Elektroindustrija d.d (ZGSE:KOEI) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for KONCAR - Elektroindustrija d.d

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

The image below, which you can click on for greater detail, shows that KONCAR - Elektroindustrija d.d had debt of €61.4m at the end of March 2024, a reduction from €68.8m over a year. But on the other hand it also has €194.9m in cash, leading to a €133.4m net cash position.

How Healthy Is KONCAR - Elektroindustrija d.d's Balance Sheet?

The latest balance sheet data shows that KONCAR - Elektroindustrija d.d had liabilities of €456.6m due within a year, and liabilities of €54.5m falling due after that. On the other hand, it had cash of €194.9m and €311.9m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that KONCAR - Elektroindustrija d.d's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €728.3m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, KONCAR - Elektroindustrija d.d boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that KONCAR - Elektroindustrija d.d grew its EBIT by 113% 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 it is future earnings, more than anything, that will determine KONCAR - Elektroindustrija 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 company can only pay off debt with cold hard cash, not accounting profits. While KONCAR - Elektroindustrija 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 - Elektroindustrija d.d produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that KONCAR - Elektroindustrija d.d has €133.4m in net cash. And it impressed us with its EBIT growth of 113% over the last year. So is KONCAR - Elektroindustrija d.d's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with KONCAR - Elektroindustrija d.d , and understanding them should be part of your investment process.

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.

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

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.

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