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.' 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 note that Maistra d.d. (ZGSE:MAIS) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Maistra d.d's Net Debt?
As you can see below, at the end of March 2021, Maistra d.d had Kn1.42b of debt, up from Kn1.36b a year ago. Click the image for more detail. However, because it has a cash reserve of Kn71.8m, its net debt is less, at about Kn1.35b.
How Strong Is Maistra d.d's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Maistra d.d had liabilities of Kn577.5m due within 12 months and liabilities of Kn1.11b due beyond that. Offsetting this, it had Kn71.8m in cash and Kn33.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Kn1.59b.
While this might seem like a lot, it is not so bad since Maistra d.d has a market capitalization of Kn3.31b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Maistra 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, Maistra d.d made a loss at the EBIT level, and saw its revenue drop to Kn594m, which is a fall of 54%. That makes us nervous, to say the least.
Not only did Maistra d.d's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost Kn121m 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 Kn31m in negative free cash flow over the last twelve months. So suffice it to say we do 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. For example, we've discovered 2 warning signs for Maistra d.d that you should be aware of before investing here.
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.
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