Brodogradiliste Viktor Lenac d.d (ZGSE:VLEN) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Brodogradiliste Viktor Lenac d.d. (ZGSE:VLEN) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Brodogradiliste Viktor Lenac d.d

How Much Debt Does Brodogradiliste Viktor Lenac d.d Carry?

As you can see below, Brodogradiliste Viktor Lenac d.d had Kn42.4m of debt at December 2020, down from Kn58.7m a year prior. However, it also had Kn35.6m in cash, and so its net debt is Kn6.88m.

How Healthy Is Brodogradiliste Viktor Lenac d.d's Balance Sheet?

The latest balance sheet data shows that Brodogradiliste Viktor Lenac d.d had liabilities of Kn74.5m due within a year, and liabilities of Kn34.7m falling due after that. Offsetting these obligations, it had cash of Kn35.6m as well as receivables valued at Kn44.6m due within 12 months. So it has liabilities totalling Kn29.1m more than its cash and near-term receivables, combined.

Given Brodogradiliste Viktor Lenac d.d has a market capitalization of Kn183.9m, 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.

Brodogradiliste Viktor Lenac d.d has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.093 and EBIT of 28.8 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. On top of that, Brodogradiliste Viktor Lenac d.d grew its EBIT by 82% 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 you can't view debt in total isolation; since Brodogradiliste Viktor Lenac 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Brodogradiliste Viktor Lenac d.d created free cash flow amounting to 14% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

The good news is that Brodogradiliste Viktor Lenac d.d's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. Taking all this data into account, it seems to us that Brodogradiliste Viktor Lenac d.d takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Brodogradiliste Viktor Lenac d.d you should be aware of, and 1 of them shouldn't be ignored.

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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