Is Grupa Univerexport Backa AD (BELEX:BABP) 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.' 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. We note that Grupa Univerexport Backa AD (BELEX:BABP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Grupa Univerexport Backa AD

How Much Debt Does Grupa Univerexport Backa AD Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Grupa Univerexport Backa AD had debt of дин227.9m, up from дин189.2m in one year. However, it does have дин24.4m in cash offsetting this, leading to net debt of about дин203.5m.

A Look At Grupa Univerexport Backa AD's Liabilities

The latest balance sheet data shows that Grupa Univerexport Backa AD had liabilities of дин342.1m due within a year, and liabilities of дин318.7m falling due after that. On the other hand, it had cash of дин24.4m and дин109.4m worth of receivables due within a year. So it has liabilities totalling дин527.1m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of дин499.4m, we think shareholders really should watch Grupa Univerexport Backa AD's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

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.

We'd say that Grupa Univerexport Backa AD's moderate net debt to EBITDA ratio ( being 1.8), indicates prudence when it comes to debt. And its commanding EBIT of 1k times its interest expense, implies the debt load is as light as a peacock feather. Pleasingly, Grupa Univerexport Backa AD is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 141% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Grupa Univerexport Backa AD'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last two years, Grupa Univerexport Backa AD created free cash flow amounting to 18% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

While Grupa Univerexport Backa AD's level of total liabilities does give us pause, its interest cover and EBIT growth rate suggest it can stay on top of its debt load. Looking at all the angles mentioned above, it does seem to us that Grupa Univerexport Backa AD is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Grupa Univerexport Backa AD you should be aware of.

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.