Health Check: How Prudently Does Jadran d.d (ZGSE:JDRN) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Jadran d.d. (ZGSE:JDRN) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Jadran d.d

What Is Jadran d.d's Net Debt?

As you can see below, at the end of December 2020, Jadran d.d had Kn245.9m of debt, up from Kn216.9m a year ago. Click the image for more detail. However, it does have Kn27.6m in cash offsetting this, leading to net debt of about Kn218.2m.

How Healthy Is Jadran d.d's Balance Sheet?

The latest balance sheet data shows that Jadran d.d had liabilities of Kn60.7m due within a year, and liabilities of Kn416.7m falling due after that. On the other hand, it had cash of Kn27.6m and Kn13.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Kn436.5m.

Given this deficit is actually higher than the company's market capitalization of Kn369.2m, we think shareholders really should watch Jadran d.d's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Jadran 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.

Over 12 months, Jadran d.d made a loss at the EBIT level, and saw its revenue drop to Kn84m, which is a fall of 34%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Jadran d.d's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping Kn40m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through Kn71m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Jadran d.d (including 2 which don't sit too well with us) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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