Here's Why Jadranski naftovod d.d (ZGSE:JNAF) Has A Meaningful Debt Burden

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. We can see that Jadranski naftovod d.d. (ZGSE:JNAF) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jadranski naftovod d.d

What Is Jadranski naftovod d.d's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Jadranski naftovod d.d had Kn84.2m of debt, an increase on Kn56.7m, over one year. However, it does have Kn329.5m in cash offsetting this, leading to net cash of Kn245.3m.

How Strong Is Jadranski naftovod d.d's Balance Sheet?

According to the last reported balance sheet, Jadranski naftovod d.d had liabilities of Kn156.8m due within 12 months, and liabilities of Kn102.9m due beyond 12 months. Offsetting this, it had Kn329.5m in cash and Kn120.7m in receivables that were due within 12 months. So it can boast Kn190.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Jadranski naftovod d.d could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jadranski naftovod d.d boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Jadranski naftovod d.d has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jadranski naftovod 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Jadranski naftovod d.d may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Jadranski naftovod d.d recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Jadranski naftovod d.d has net cash of Kn245.3m, as well as more liquid assets than liabilities. So while Jadranski naftovod d.d does not have a great balance sheet, it's certainly not too bad. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Jadranski naftovod d.d's earnings per share history for free.

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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