These 4 Measures Indicate That Losinjska Plovidba Holding d.d (ZGSE:LPLH) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Losinjska Plovidba Holding d.d. (ZGSE:LPLH) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, 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 €4.31m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds €9.97m in cash, so it actually has €5.66m net cash.

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

We can see from the most recent balance sheet that Losinjska Plovidba Holding d.d had liabilities of €3.35m falling due within a year, and liabilities of €4.42m due beyond that. Offsetting these obligations, it had cash of €9.97m as well as receivables valued at €3.26m due within 12 months. So it can boast €5.46m more liquid assets than total liabilities.

This surplus liquidity suggests that Losinjska Plovidba Holding d.d's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Losinjska Plovidba Holding d.d boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Losinjska Plovidba Holding d.d's EBIT dived 18%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Losinjska Plovidba Holding d.d's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Losinjska Plovidba Holding 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. Over the last three years, Losinjska Plovidba Holding d.d recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Losinjska Plovidba Holding d.d has net cash of €5.66m, as well as more liquid assets than liabilities. So we are not troubled with Losinjska Plovidba Holding d.d's debt use. 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. We've identified 1 warning sign with Losinjska Plovidba Holding d.d , and understanding them should be part of your investment process.

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.