Does IMPOL SEVAL Valjaonica Aluminijuma a.d (BELEX:IMPL) Have A Healthy Balance Sheet?

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.' 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 IMPOL SEVAL Valjaonica Aluminijuma a.d. (BELEX:IMPL) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for IMPOL SEVAL Valjaonica Aluminijuma a.d

What Is IMPOL SEVAL Valjaonica Aluminijuma a.d's Net Debt?

As you can see below, IMPOL SEVAL Valjaonica Aluminijuma a.d had дин2.63b of debt at December 2021, down from дин3.26b a year prior. However, because it has a cash reserve of дин777.5m, its net debt is less, at about дин1.85b.

How Healthy Is IMPOL SEVAL Valjaonica Aluminijuma a.d's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that IMPOL SEVAL Valjaonica Aluminijuma a.d had liabilities of дин7.32b due within 12 months and liabilities of дин1.41b due beyond that. Offsetting this, it had дин777.5m in cash and дин3.30b in receivables that were due within 12 months. So its liabilities total дин4.65b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of дин3.86b, we think shareholders really should watch IMPOL SEVAL Valjaonica Aluminijuma a.d's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

IMPOL SEVAL Valjaonica Aluminijuma a.d has a low net debt to EBITDA ratio of only 1.1. And its EBIT covers its interest expense a whopping 31.0 times over. So we're pretty relaxed about its super-conservative use of debt. Even more impressive was the fact that IMPOL SEVAL Valjaonica Aluminijuma a.d grew its EBIT by 3,814% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is IMPOL SEVAL Valjaonica Aluminijuma a.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 company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, IMPOL SEVAL Valjaonica Aluminijuma a.d recorded free cash flow worth 73% 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.

Our View

Happily, IMPOL SEVAL Valjaonica Aluminijuma a.d's impressive interest cover implies it has the upper hand on its debt. But we must concede we find its level of total liabilities has the opposite effect. Looking at all the aforementioned factors together, it strikes us that IMPOL SEVAL Valjaonica Aluminijuma a.d can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that IMPOL SEVAL Valjaonica Aluminijuma a.d is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.