Is Viro Tvornica Secera d.d (ZGSE:VIRO) A Risky Investment?

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.' 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, Viro Tvornica Secera d.d. (ZGSE:VIRO) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Viro Tvornica Secera d.d

What Is Viro Tvornica Secera d.d's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Viro Tvornica Secera d.d had debt of Kn112.8m, up from Kn95.2m in one year. On the flip side, it has Kn4.71m in cash leading to net debt of about Kn108.0m.

A Look At Viro Tvornica Secera d.d's Liabilities

Zooming in on the latest balance sheet data, we can see that Viro Tvornica Secera d.d had liabilities of Kn252.0m due within 12 months and liabilities of Kn3.31m due beyond that. Offsetting these obligations, it had cash of Kn4.71m as well as receivables valued at Kn92.1m due within 12 months. So it has liabilities totalling Kn158.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the Kn48.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Viro Tvornica Secera d.d would probably need a major re-capitalization if its creditors were to demand repayment. 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 Viro Tvornica Secera 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.

In the last year Viro Tvornica Secera d.d wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to Kn73m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Viro Tvornica Secera d.d had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping Kn14m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through Kn23m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. Case in point: We've spotted 3 warning signs for Viro Tvornica Secera d.d you should be aware of.

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.

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

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.