These 4 Measures Indicate That Koncar - Elektroindustrija d.d (ZGSE:KOEI) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Koncar - Elektroindustrija d.d. (ZGSE:KOEI) makes use of debt. 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. 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. 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 Net Debt?

As you can see below, Koncar - Elektroindustrija d.d had Kn266.8m of debt at September 2020, down from Kn293.4m a year prior. However, it does have Kn655.3m in cash offsetting this, leading to net cash of Kn388.5m.

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

The latest balance sheet data shows that Koncar - Elektroindustrija d.d had liabilities of Kn998.8m due within a year, and liabilities of Kn255.9m falling due after that. Offsetting these obligations, it had cash of Kn655.3m as well as receivables valued at Kn858.6m due within 12 months. So it actually has Kn259.2m more liquid assets than total liabilities.

This excess liquidity suggests that Koncar - Elektroindustrija d.d is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. 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.

Even more impressive was the fact that Koncar - Elektroindustrija d.d grew its EBIT by 122% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 - Elektroindustrija d.d's ability to maintain a healthy balance sheet going forward. 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 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. Over the last three years, Koncar - Elektroindustrija d.d saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Koncar - Elektroindustrija d.d has net cash of Kn388.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 122% over the last year. So we don't think Koncar - Elektroindustrija d.d's use of debt is risky. 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 instance, we've identified 3 warning signs for Koncar - Elektroindustrija d.d (1 is concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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