Is Zwack Unicum Nyrt (BUSE:ZWACK) Using Too Much Debt?

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.' 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. As with many other companies Zwack Unicum Nyrt. (BUSE:ZWACK) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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.

See our latest analysis for Zwack Unicum Nyrt

What Is Zwack Unicum Nyrt's Net Debt?

As you can see below, at the end of December 2020, Zwack Unicum Nyrt had Ft2.46b of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds Ft6.66b in cash, so it actually has Ft4.20b net cash.

How Healthy Is Zwack Unicum Nyrt's Balance Sheet?

The latest balance sheet data shows that Zwack Unicum Nyrt had liabilities of Ft9.05b due within a year, and liabilities of Ft501.0m falling due after that. Offsetting this, it had Ft6.66b in cash and Ft4.41b in receivables that were due within 12 months. So it actually has Ft1.52b more liquid assets than total liabilities.

This surplus suggests that Zwack Unicum Nyrt has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zwack Unicum Nyrt boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Zwack Unicum Nyrt grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. 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 Zwack Unicum Nyrt will need earnings to service that debt. 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. While Zwack Unicum Nyrt has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Zwack Unicum Nyrt generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Zwack Unicum Nyrt has net cash of Ft4.20b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of Ft2.3b, being 91% of its EBIT. So is Zwack Unicum Nyrt's debt a risk? It doesn't seem so to us. 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 1 warning sign for Zwack Unicum Nyrt that you should be aware of before investing here.

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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