Is Viro Tvornica Secera d.d (ZGSE:VIRO) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Viro Tvornica Secera d.d

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

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Viro Tvornica Secera d.d had Kn112.8m of debt, an increase on Kn95.2m, over one year. However, it does have Kn4.71m in cash offsetting this, leading to net debt of about Kn108.0m.

How Strong Is Viro Tvornica Secera d.d's Balance Sheet?

The latest balance sheet data shows that Viro Tvornica Secera d.d had liabilities of Kn252.0m due within a year, and liabilities of Kn3.31m falling due after that. On the other hand, it had cash of Kn4.71m and Kn92.1m worth of receivables due within a year. So it has liabilities totalling Kn158.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the Kn44.4m 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Viro Tvornica Secera d.d will need earnings to service that debt. 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.

Over 12 months, Viro Tvornica Secera d.d reported revenue of Kn73m, which is a gain of 6.8%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Viro Tvornica Secera d.d produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable Kn14m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through Kn20m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Viro Tvornica Secera d.d has 2 warning signs 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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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.