Does INA-Industrija nafte d.d (ZGSE:INA) Have A Healthy Balance Sheet?

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.' 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 note that INA-Industrija nafte, d.d. (ZGSE:INA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for INA-Industrija nafte d.d

How Much Debt Does INA-Industrija nafte d.d Carry?

You can click the graphic below for the historical numbers, but it shows that INA-Industrija nafte d.d had Kn2.09b of debt in December 2020, down from Kn3.16b, one year before. However, it does have Kn477.0m in cash offsetting this, leading to net debt of about Kn1.61b.

How Strong Is INA-Industrija nafte d.d's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that INA-Industrija nafte d.d had liabilities of Kn5.60b due within 12 months and liabilities of Kn4.04b due beyond that. Offsetting this, it had Kn477.0m in cash and Kn1.39b in receivables that were due within 12 months. So it has liabilities totalling Kn7.77b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since INA-Industrija nafte d.d has a market capitalization of Kn31.0b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since INA-Industrija nafte 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.

Over 12 months, INA-Industrija nafte d.d made a loss at the EBIT level, and saw its revenue drop to Kn15b, which is a fall of 35%. To be frank that doesn't bode well.

Caveat Emptor

While INA-Industrija nafte 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 Kn780m 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. For example, we would not want to see a repeat of last year's loss of Kn1.1b. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with INA-Industrija nafte d.d , 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. 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.
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