Plava laguna d.d (ZGSE:PLAG) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Plava laguna d.d. (ZGSE:PLAG) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Plava laguna d.d

How Much Debt Does Plava laguna d.d Carry?

As you can see below, Plava laguna d.d had Kn803.5m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have Kn496.5m in cash offsetting this, leading to net debt of about Kn307.0m.

A Look At Plava laguna d.d's Liabilities

The latest balance sheet data shows that Plava laguna d.d had liabilities of Kn288.6m due within a year, and liabilities of Kn747.1m falling due after that. Offsetting this, it had Kn496.5m in cash and Kn34.6m in receivables that were due within 12 months. So its liabilities total Kn504.7m more than the combination of its cash and short-term receivables.

Of course, Plava laguna d.d has a market capitalization of Kn3.32b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Plava laguna d.d made a loss at the EBIT level, and saw its revenue drop to Kn481m, which is a fall of 59%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Plava laguna d.d's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost Kn120m 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. Another cause for caution is that is bled Kn112m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Plava laguna d.d (of which 1 is a bit concerning!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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