Is Atlantska Plovidba d.d (ZGSE:ATPL) Using Too Much Debt?

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. We note that Atlantska Plovidba d.d. (ZGSE:ATPL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Atlantska Plovidba d.d

How Much Debt Does Atlantska Plovidba d.d Carry?

As you can see below, Atlantska Plovidba d.d had Kn755.8m of debt at September 2020, down from Kn811.3m a year prior. However, it also had Kn27.0m in cash, and so its net debt is Kn728.7m.

A Look At Atlantska Plovidba d.d's Liabilities

According to the last reported balance sheet, Atlantska Plovidba d.d had liabilities of Kn148.7m due within 12 months, and liabilities of Kn698.1m due beyond 12 months. On the other hand, it had cash of Kn27.0m and Kn16.5m worth of receivables due within a year. So its liabilities total Kn803.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the Kn250.8m 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, Atlantska Plovidba 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 it is Atlantska Plovidba 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.

In the last year Atlantska Plovidba d.d had a loss before interest and tax, and actually shrunk its revenue by 19%, to Kn289m. That's not what we would hope to see.

Caveat Emptor

Not only did Atlantska Plovidba d.d's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost Kn7.3m 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. Nevertheless, we would not bet on it given that it lost Kn47m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Atlantska Plovidba d.d that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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