Here's Why FTB Turizam d.d (ZGSE:LRHC) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, FTB Turizam d.d. (ZGSE:LRHC) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 FTB Turizam d.d

What Is FTB Turizam d.d's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 FTB Turizam d.d had Kn140.3m of debt, an increase on Kn122.6m, over one year. However, because it has a cash reserve of Kn12.1m, its net debt is less, at about Kn128.2m.

A Look At FTB Turizam d.d's Liabilities

The latest balance sheet data shows that FTB Turizam d.d had liabilities of Kn34.3m due within a year, and liabilities of Kn135.0m falling due after that. Offsetting this, it had Kn12.1m in cash and Kn6.45m in receivables that were due within 12 months. So its liabilities total Kn150.8m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since FTB Turizam d.d has a market capitalization of Kn411.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is FTB Turizam 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, FTB Turizam d.d made a loss at the EBIT level, and saw its revenue drop to Kn2.3m, which is a fall of 99%. That makes us nervous, to say the least.

Caveat Emptor

While FTB Turizam 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 Kn58m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled Kn34m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with FTB Turizam d.d (including 3 which are potentially serious) .

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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