Here's Why Liburnia Riviera Hoteli d.d (ZGSE:LRH) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Liburnia Riviera Hoteli d.d. (ZGSE:LRH) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Liburnia Riviera Hoteli d.d

What Is Liburnia Riviera Hoteli d.d's Debt?

As you can see below, at the end of June 2021, Liburnia Riviera Hoteli d.d had Kn317.8m of debt, up from Kn239.7m a year ago. Click the image for more detail. However, because it has a cash reserve of Kn19.4m, its net debt is less, at about Kn298.4m.

A Look At Liburnia Riviera Hoteli d.d's Liabilities

According to the last reported balance sheet, Liburnia Riviera Hoteli d.d had liabilities of Kn129.3m due within 12 months, and liabilities of Kn250.7m due beyond 12 months. Offsetting this, it had Kn19.4m in cash and Kn16.1m in receivables that were due within 12 months. So its liabilities total Kn344.5m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Liburnia Riviera Hoteli d.d has a market capitalization of Kn841.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Liburnia Riviera Hoteli 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.

In the last year Liburnia Riviera Hoteli d.d had a loss before interest and tax, and actually shrunk its revenue by 43%, to Kn134m. To be frank that doesn't bode well.

Caveat Emptor

While Liburnia Riviera Hoteli d.d's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable Kn129m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through Kn66m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 2 warning signs for Liburnia Riviera Hoteli d.d that you should be aware of before investing here.

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.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

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