Here's Why Losinjska Plovidba Holding d.d (ZGSE:LPLH) Has A Meaningful Debt Burden

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Losinjska Plovidba Holding d.d. (ZGSE:LPLH) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Losinjska Plovidba Holding d.d

How Much Debt Does Losinjska Plovidba Holding d.d Carry?

As you can see below, Losinjska Plovidba Holding d.d had €3.89m of debt at March 2023, down from €4.19m a year prior. However, because it has a cash reserve of €2.36m, its net debt is less, at about €1.52m.

A Look At Losinjska Plovidba Holding d.d's Liabilities

Zooming in on the latest balance sheet data, we can see that Losinjska Plovidba Holding d.d had liabilities of €5.54m due within 12 months and liabilities of €3.62m due beyond that. On the other hand, it had cash of €2.36m and €4.46m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.34m.

Given Losinjska Plovidba Holding d.d has a market capitalization of €16.7m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Losinjska Plovidba Holding d.d has a low net debt to EBITDA ratio of only 0.86. And its EBIT covers its interest expense a whopping 32.3 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, Losinjska Plovidba Holding d.d saw its EBIT drop by 3.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Losinjska Plovidba Holding 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Losinjska Plovidba Holding d.d saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Neither Losinjska Plovidba Holding d.d's ability to convert EBIT to free cash flow nor its EBIT growth rate gave us confidence in its ability to take on more debt. But the good news is it seems to be able to cover its interest expense with its EBIT with ease. We think that Losinjska Plovidba Holding d.d's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Losinjska Plovidba Holding d.d (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.