Is Zagrebacke Pekarne Klara d.d (ZGSE:ZPKL) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Zagrebacke Pekarne Klara d.d. (ZGSE:ZPKL) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Zagrebacke Pekarne Klara d.d

What Is Zagrebacke Pekarne Klara d.d's Net Debt?

The chart below, which you can click on for greater detail, shows that Zagrebacke Pekarne Klara d.d had €4.32m in debt in December 2024; about the same as the year before. However, it also had €1.76m in cash, and so its net debt is €2.56m.

A Look At Zagrebacke Pekarne Klara d.d's Liabilities

We can see from the most recent balance sheet that Zagrebacke Pekarne Klara d.d had liabilities of €12.4m falling due within a year, and liabilities of €5.87m due beyond that. On the other hand, it had cash of €1.76m and €7.64m worth of receivables due within a year. So it has liabilities totalling €8.86m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Zagrebacke Pekarne Klara d.d is worth €26.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Zagrebacke Pekarne Klara d.d's net debt is only 0.37 times its EBITDA. And its EBIT easily covers its interest expense, being 52.6 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Zagrebacke Pekarne Klara d.d grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zagrebacke Pekarne Klara 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. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Zagrebacke Pekarne Klara d.d produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

The good news is that Zagrebacke Pekarne Klara d.d's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. Zooming out, Zagrebacke Pekarne Klara d.d seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Zagrebacke Pekarne Klara d.d (including 1 which makes us a bit uncomfortable) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.