Is FTB Turizam d.d (ZGSE:LRHC) A Risky Investment?

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.' 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. We can see that FTB Turizam d.d. (ZGSE:LRHC) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for FTB Turizam d.d

What Is FTB Turizam d.d's Debt?

The image below, which you can click on for greater detail, shows that FTB Turizam d.d had debt of Kn109.8m at the end of September 2022, a reduction from Kn124.7m over a year. However, it also had Kn48.7m in cash, and so its net debt is Kn61.0m.

How Healthy Is FTB Turizam d.d's Balance Sheet?

The latest balance sheet data shows that FTB Turizam d.d had liabilities of Kn43.8m due within a year, and liabilities of Kn110.0m falling due after that. Offsetting these obligations, it had cash of Kn48.7m as well as receivables valued at Kn21.8m due within 12 months. So it has liabilities totalling Kn83.2m more than its cash and near-term receivables, combined.

This deficit isn't so bad because FTB Turizam d.d is worth Kn396.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

FTB Turizam d.d has net debt of just 1.2 times EBITDA, indicating that it is certainly not a reckless borrower. And it boasts interest cover of 7.5 times, which is more than adequate. It was also good to see that despite losing money on the EBIT line last year, FTB Turizam d.d turned things around in the last 12 months, delivering and EBIT of Kn22m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since FTB Turizam d.d will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, FTB Turizam d.d actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

FTB Turizam d.d's conversion of EBIT to free cash flow suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And its net debt to EBITDA is good too. When we consider the range of factors above, it looks like FTB Turizam d.d is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. 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. We've identified 4 warning signs with FTB Turizam d.d (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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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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.