Naftna Industrija Srbije a.d (BELEX:NIIS) Seems To Use Debt Quite Sensibly

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.' 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 Naftna Industrija Srbije a.d. (BELEX:NIIS) makes use of debt. But the more important question is: how much risk is that debt creating?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Naftna Industrija Srbije a.d

What Is Naftna Industrija Srbije a.d's Debt?

You can click the graphic below for the historical numbers, but it shows that Naftna Industrija Srbije a.d had дин5.96b of debt in June 2023, down from дин76.2b, one year before. However, its balance sheet shows it holds дин73.7b in cash, so it actually has дин67.8b net cash.

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

We can see from the most recent balance sheet that Naftna Industrija Srbije a.d had liabilities of дин80.0b falling due within a year, and liabilities of дин77.2b due beyond that. Offsetting these obligations, it had cash of дин73.7b as well as receivables valued at дин35.0b due within 12 months. So its liabilities total дин48.5b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Naftna Industrija Srbije a.d is worth дин119.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Naftna Industrija Srbije a.d also has more cash than debt, so we're pretty confident it can manage its debt safely.

While Naftna Industrija Srbije a.d doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Naftna Industrija Srbije a.d produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. 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 дин67.8b. So we are not troubled with Naftna Industrija Srbije a.d's debt use. 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. For example Naftna Industrija Srbije a.d has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.