Cakovecki mlinovi d.d (ZGSE:CKML) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Cakovecki mlinovi d.d. (ZGSE:CKML) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Cakovecki mlinovi d.d

What Is Cakovecki mlinovi d.d's Debt?

You can click the graphic below for the historical numbers, but it shows that Cakovecki mlinovi d.d had Kn33.0m of debt in March 2021, down from Kn66.8m, one year before. However, its balance sheet shows it holds Kn238.5m in cash, so it actually has Kn205.5m net cash.

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

Zooming in on the latest balance sheet data, we can see that Cakovecki mlinovi d.d had liabilities of Kn199.3m due within 12 months and liabilities of Kn51.3m due beyond that. Offsetting these obligations, it had cash of Kn238.5m as well as receivables valued at Kn67.5m due within 12 months. So it can boast Kn55.3m more liquid assets than total liabilities.

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

On the other hand, Cakovecki mlinovi d.d saw its EBIT drop by 7.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Cakovecki mlinovi d.d's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Cakovecki mlinovi d.d actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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 Kn205.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of Kn38m, being 109% of its EBIT. So is Cakovecki mlinovi d.d's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Cakovecki mlinovi d.d that you should be aware of.

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.

If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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