Luka Ploce d.d (ZGSE:LKPC) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Luka Ploce d.d. (ZGSE:LKPC) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Luka Ploce d.d

What Is Luka Ploce d.d's Debt?

The image below, which you can click on for greater detail, shows that Luka Ploce d.d had debt of €14.0m at the end of September 2024, a reduction from €16.1m over a year. However, its balance sheet shows it holds €29.9m in cash, so it actually has €15.9m net cash.

How Healthy Is Luka Ploce d.d's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Luka Ploce d.d had liabilities of €13.5m due within 12 months and liabilities of €19.2m due beyond that. On the other hand, it had cash of €29.9m and €25.2m worth of receivables due within a year. So it can boast €22.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Luka Ploce d.d's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Luka Ploce d.d boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Luka Ploce d.d if management cannot prevent a repeat of the 25% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Luka Ploce 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Luka Ploce d.d may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Luka Ploce d.d actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Luka Ploce d.d has €15.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €30m, being 106% of its EBIT. So is Luka Ploce d.d's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Luka Ploce d.d has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.