Is Jadranski naftovod d.d (ZGSE:JNAF) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Jadranski naftovod d.d. (ZGSE:JNAF) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jadranski naftovod d.d

What Is Jadranski naftovod d.d's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Jadranski naftovod d.d had Kn90.2m of debt, an increase on Kn84.9m, over one year. However, it does have Kn658.4m in cash offsetting this, leading to net cash of Kn568.2m.

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

According to the last reported balance sheet, Jadranski naftovod d.d had liabilities of Kn81.3m due within 12 months, and liabilities of Kn123.4m due beyond 12 months. Offsetting these obligations, it had cash of Kn658.4m as well as receivables valued at Kn371.6m due within 12 months. So it actually has Kn825.3m more liquid assets than total liabilities.

This surplus suggests that Jadranski naftovod d.d has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jadranski naftovod d.d has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Jadranski naftovod d.d grew its EBIT at 20% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jadranski naftovod 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jadranski naftovod d.d has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Jadranski naftovod d.d recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 Kn568.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of Kn431m, being 69% of its EBIT. So is Jadranski naftovod d.d's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Jadranski naftovod d.d has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.