INA-Industrija nafte d.d (ZGSE:INA) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, INA-Industrija nafte, d.d. (ZGSE:INA) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See 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 as of December 2023 INA-Industrija nafte d.d had €366.6m of debt, an increase on €333.1m, over one year. However, it also had €150.9m in cash, and so its net debt is €215.7m.

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

According to the last reported balance sheet, INA-Industrija nafte d.d had liabilities of €774.9m due within 12 months, and liabilities of €724.4m due beyond 12 months. On the other hand, it had cash of €150.9m and €322.0m worth of receivables due within a year. So it has liabilities totalling €1.03b 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 €4.50b, 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

INA-Industrija nafte d.d has a low net debt to EBITDA ratio of only 0.40. And its EBIT easily covers its interest expense, being 31.7 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, INA-Industrija nafte d.d's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is INA-Industrija nafte d.d's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, INA-Industrija nafte d.d recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

INA-Industrija nafte d.d's interest cover was a real positive on this analysis, as was its net debt to EBITDA. But truth be told its EBIT growth rate had us nibbling our nails. Looking at all this data makes us feel a little cautious about INA-Industrija nafte d.d's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more 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. To that end, you should be aware of the 1 warning sign we've spotted with INA-Industrija nafte d.d .

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.