Stock Analysis

Here's Why Atlantic Grupa d.d (ZGSE:ATGR) Can Manage Its Debt Responsibly

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ZGSE:ATGR
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Warren Buffett famously said, '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. We note that Atlantic Grupa d.d. (ZGSE:ATGR) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for Atlantic Grupa d.d

What Is Atlantic Grupa d.d's Debt?

The image below, which you can click on for greater detail, shows that Atlantic Grupa d.d had debt of Kn751.3m at the end of September 2020, a reduction from Kn1.10b over a year. However, it does have Kn423.1m in cash offsetting this, leading to net debt of about Kn328.2m.

debt-equity-history-analysis
ZGSE:ATGR Debt to Equity History December 30th 2020

How Healthy Is Atlantic Grupa d.d's Balance Sheet?

The latest balance sheet data shows that Atlantic Grupa d.d had liabilities of Kn1.99b due within a year, and liabilities of Kn499.0m falling due after that. On the other hand, it had cash of Kn423.1m and Kn1.25b worth of receivables due within a year. So it has liabilities totalling Kn808.2m more than its cash and near-term receivables, combined.

Given Atlantic Grupa d.d has a market capitalization of Kn4.49b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Atlantic Grupa d.d has a low net debt to EBITDA ratio of only 0.56. And its EBIT covers its interest expense a whopping 15.2 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Atlantic Grupa d.d's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Atlantic Grupa d.d's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Atlantic Grupa d.d recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Our View

Atlantic Grupa d.d's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Looking at the bigger picture, we think Atlantic Grupa d.d's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Atlantic Grupa d.d is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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About ZGSE:ATGR

Atlantic Grupa d.d

Atlantic Grupa d.d., together with its subsidiaries, engages in the research, development, production, and distribution fast moving consumer goods in Southeast Europe, the European markets, Russia, and the Commonwealth of Independent States.

Flawless balance sheet second-rate dividend payer.