We Think Jadranski naftovod d.d (ZGSE:JNAF) Can Stay On Top Of Its 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Jadranski naftovod d.d. (ZGSE:JNAF) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jadranski naftovod d.d

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

As you can see below, Jadranski naftovod d.d had Kn78.4m of debt at December 2020, down from Kn85.0m a year prior. However, its balance sheet shows it holds Kn362.9m in cash, so it actually has Kn284.4m net cash.

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

We can see from the most recent balance sheet that Jadranski naftovod d.d had liabilities of Kn130.9m falling due within a year, and liabilities of Kn100.6m due beyond that. Offsetting this, it had Kn362.9m in cash and Kn87.5m in receivables that were due within 12 months. So it actually has Kn218.9m 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. 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 17% over the last year, further increasing its ability to manage debt. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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. Considering the last three years, Jadranski naftovod d.d actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to investigate a company's debt, in this case Jadranski naftovod d.d has Kn284.4m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 17% over the last year. So we are not troubled with Jadranski naftovod d.d's debt use. 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.

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.

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