We Think Adriatic Croatia International Club d.d (ZGSE:ACI) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. 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.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Adriatic Croatia International Club d.d

How Much Debt Does Adriatic Croatia International Club d.d Carry?

You can click the graphic below for the historical numbers, but it shows that Adriatic Croatia International Club d.d had Kn78.3m of debt in March 2021, down from Kn91.9m, one year before. But it also has Kn135.5m in cash to offset that, meaning it has Kn57.2m net cash.

How Healthy Is Adriatic Croatia International Club d.d's Balance Sheet?

We can see from the most recent balance sheet that Adriatic Croatia International Club d.d had liabilities of Kn75.7m falling due within a year, and liabilities of Kn88.6m due beyond that. Offsetting these obligations, it had cash of Kn135.5m as well as receivables valued at Kn24.0m due within 12 months. So its liabilities total Kn4.79m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Adriatic Croatia International Club d.d's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the Kn733.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Adriatic Croatia International Club d.d boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Adriatic Croatia International Club d.d if management cannot prevent a repeat of the 95% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Adriatic Croatia International Club 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. In the last three years, Adriatic Croatia International Club d.d created free cash flow amounting to 3.4% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Adriatic Croatia International Club d.d has Kn57.2m in net cash. So we are not troubled with Adriatic Croatia International Club d.d's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Adriatic Croatia International Club d.d (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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