KONCAR - Elektroindustrija d.d (ZGSE:KOEI) Could Easily Take On More 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.' 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. Importantly, KONCAR - Elektroindustrija d.d. (ZGSE:KOEI) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for KONCAR - Elektroindustrija d.d

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

You can click the graphic below for the historical numbers, but it shows that KONCAR - Elektroindustrija d.d had €43.6m of debt in September 2024, down from €68.8m, one year before. But on the other hand it also has €197.9m in cash, leading to a €154.3m net cash position.

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

According to the last reported balance sheet, KONCAR - Elektroindustrija d.d had liabilities of €419.0m due within 12 months, and liabilities of €73.9m due beyond 12 months. Offsetting this, it had €197.9m in cash and €313.6m in receivables that were due within 12 months. So it actually has €18.7m more liquid assets than total liabilities.

Having regard to KONCAR - Elektroindustrija d.d's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €1.18b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that KONCAR - Elektroindustrija d.d has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, KONCAR - Elektroindustrija d.d grew its EBIT by 128% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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. Over the last three years, KONCAR - Elektroindustrija d.d recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case KONCAR - Elektroindustrija d.d has €154.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in €179m. So is KONCAR - Elektroindustrija 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 - Elektroindustrija 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.