Is Plava laguna d.d (ZGSE:PLAG) Using Too Much 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.' 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. Importantly, Plava laguna d.d. (ZGSE:PLAG) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Plava laguna d.d

What Is Plava laguna d.d's Debt?

As you can see below, at the end of September 2020, Plava laguna d.d had Kn827.3m of debt, up from Kn579.8m a year ago. Click the image for more detail. However, it also had Kn572.7m in cash, and so its net debt is Kn254.7m.

How Healthy Is Plava laguna d.d's Balance Sheet?

According to the last reported balance sheet, Plava laguna d.d had liabilities of Kn202.1m due within 12 months, and liabilities of Kn865.5m due beyond 12 months. Offsetting this, it had Kn572.7m in cash and Kn46.0m in receivables that were due within 12 months. So its liabilities total Kn448.9m more than the combination of its cash and short-term receivables.

Of course, Plava laguna d.d has a market capitalization of Kn3.29b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Plava laguna 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.

In the last year Plava laguna d.d had a loss before interest and tax, and actually shrunk its revenue by 64%, to Kn442m. To be frank that doesn't bode well.

Caveat Emptor

While Plava laguna 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 Kn143m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled Kn232m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Plava laguna d.d (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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