Is Naftna Industrija Srbije a.d (BELEX:NIIS) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Naftna Industrija Srbije a.d. (BELEX:NIIS) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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 Naftna Industrija Srbije a.d

How Much Debt Does Naftna Industrija Srbije a.d Carry?

You can click the graphic below for the historical numbers, but it shows that Naftna Industrija Srbije a.d had дин69.3b of debt in December 2022, down from дин77.7b, one year before. However, its balance sheet shows it holds дин94.2b in cash, so it actually has дин24.9b net cash.

How Strong Is Naftna Industrija Srbije a.d's Balance Sheet?

According to the last reported balance sheet, Naftna Industrija Srbije a.d had liabilities of дин85.5b due within 12 months, and liabilities of дин80.1b due beyond 12 months. Offsetting these obligations, it had cash of дин94.2b as well as receivables valued at дин36.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by дин34.8b.

While this might seem like a lot, it is not so bad since Naftna Industrija Srbije a.d has a market capitalization of дин112.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Naftna Industrija Srbije a.d boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Naftna Industrija Srbije a.d grew its EBIT by 289% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Naftna Industrija Srbije a.d can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Naftna Industrija Srbije a.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 most recent two years, Naftna Industrija Srbije a.d recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Naftna Industrija Srbije a.d does have more liabilities than liquid assets, it also has net cash of дин24.9b. And it impressed us with its EBIT growth of 289% over the last year. So we don't think Naftna Industrija Srbije a.d's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Naftna Industrija Srbije a.d you should be aware of, and 1 of them doesn't sit too well with us.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.