Is Adriatic Croatia International Club d.d (ZGSE:ACI) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Adriatic Croatia International Club d.d. (ZGSE:ACI) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Adriatic Croatia International Club d.d

What Is Adriatic Croatia International Club d.d's Debt?

The image below, which you can click on for greater detail, shows that Adriatic Croatia International Club d.d had debt of Kn86.1m at the end of September 2020, a reduction from Kn93.6m over a year. However, it does have Kn99.1m in cash offsetting this, leading to net cash of Kn13.0m.

A Look At Adriatic Croatia International Club d.d's Liabilities

According to the last reported balance sheet, Adriatic Croatia International Club d.d had liabilities of Kn107.0m due within 12 months, and liabilities of Kn97.4m due beyond 12 months. On the other hand, it had cash of Kn99.1m and Kn90.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Kn14.6m.

Of course, Adriatic Croatia International Club d.d has a market capitalization of Kn677.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Adriatic Croatia International Club d.d also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Adriatic Croatia International Club d.d's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Adriatic Croatia International Club d.d had a loss before interest and tax, and actually shrunk its revenue by 18%, to Kn174m. That's not what we would hope to see.

So How Risky Is Adriatic Croatia International Club d.d?

While Adriatic Croatia International Club d.d lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of Kn496k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Adriatic Croatia International Club d.d .

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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