Cakovecki mlinovi d.d (ZGSE:CKML) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Cakovecki mlinovi d.d. (ZGSE:CKML) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Cakovecki mlinovi d.d

How Much Debt Does Cakovecki mlinovi d.d Carry?

You can click the graphic below for the historical numbers, but it shows that Cakovecki mlinovi d.d had Kn31.5m of debt in September 2020, down from Kn38.8m, one year before. However, its balance sheet shows it holds Kn92.7m in cash, so it actually has Kn61.2m net cash.

How Strong Is Cakovecki mlinovi d.d's Balance Sheet?

The latest balance sheet data shows that Cakovecki mlinovi d.d had liabilities of Kn225.4m due within a year, and liabilities of Kn36.0m falling due after that. On the other hand, it had cash of Kn92.7m and Kn263.7m worth of receivables due within a year. So it can boast Kn94.9m more liquid assets than total liabilities.

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

But the other side of the story is that Cakovecki mlinovi d.d saw its EBIT decline by 3.7% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Cakovecki mlinovi 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. While Cakovecki mlinovi 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 last three years, Cakovecki mlinovi d.d actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Cakovecki mlinovi d.d has net cash of Kn61.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of Kn90m, being 127% of its EBIT. So we don't think Cakovecki mlinovi d.d's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Cakovecki mlinovi d.d has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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