Does Cakovecki mlinovi d.d (ZGSE:CKML) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Cakovecki mlinovi d.d. (ZGSE:CKML) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Cakovecki mlinovi d.d

What Is Cakovecki mlinovi d.d's Debt?

As you can see below, Cakovecki mlinovi d.d had Kn34.1m of debt at December 2020, down from Kn37.2m a year prior. But on the other hand it also has Kn88.9m in cash, leading to a Kn54.9m net cash position.

A Look At Cakovecki mlinovi d.d's Liabilities

We can see from the most recent balance sheet that Cakovecki mlinovi d.d had liabilities of Kn217.6m falling due within a year, and liabilities of Kn51.7m due beyond that. On the other hand, it had cash of Kn88.9m and Kn245.0m worth of receivables due within a year. So it can boast Kn64.7m 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.

Also positive, Cakovecki mlinovi d.d grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. 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 Kn54.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of Kn68m, being 150% of its EBIT. So we don't think Cakovecki mlinovi d.d's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Cakovecki mlinovi d.d has 1 warning sign we think 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.

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