Is Luka Rijeka d.d (ZGSE:LKRI) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Luka Rijeka d.d. (ZGSE:LKRI) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Luka Rijeka d.d

How Much Debt Does Luka Rijeka d.d Carry?

As you can see below, at the end of June 2022, Luka Rijeka d.d had Kn123.0m of debt, up from Kn65.5m a year ago. Click the image for more detail. However, because it has a cash reserve of Kn47.5m, its net debt is less, at about Kn75.6m.

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

We can see from the most recent balance sheet that Luka Rijeka d.d had liabilities of Kn215.6m falling due within a year, and liabilities of Kn331.6m due beyond that. On the other hand, it had cash of Kn47.5m and Kn49.3m worth of receivables due within a year. So it has liabilities totalling Kn450.4m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of Kn750.1m, so it does suggest shareholders should keep an eye on Luka Rijeka d.d's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Luka Rijeka 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, Luka Rijeka d.d reported revenue of Kn167m, which is a gain of 8.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Luka Rijeka d.d produced an earnings before interest and tax (EBIT) loss. Indeed, it lost Kn4.1m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of Kn10.0m and the profit of Kn25m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Luka Rijeka d.d you should know about.

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.

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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.