SALUS Ljubljana d. d (LJSE:SALR) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that SALUS, Ljubljana, d. d. (LJSE:SALR) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SALUS Ljubljana d. d

What Is SALUS Ljubljana d. d's Net Debt?

The image below, which you can click on for greater detail, shows that SALUS Ljubljana d. d had debt of €6.85m at the end of June 2022, a reduction from €10.7m over a year. However, it does have €12.0m in cash offsetting this, leading to net cash of €5.12m.

How Healthy Is SALUS Ljubljana d. d's Balance Sheet?

The latest balance sheet data shows that SALUS Ljubljana d. d had liabilities of €100.0m due within a year, and liabilities of €9.75m falling due after that. Offsetting this, it had €12.0m in cash and €67.3m in receivables that were due within 12 months. So its liabilities total €30.4m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since SALUS Ljubljana d. d has a market capitalization of €135.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, SALUS Ljubljana d. d also has more cash than debt, so we're pretty confident it can manage its debt safely.

While SALUS Ljubljana d. d doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SALUS Ljubljana d. d will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While SALUS Ljubljana d. d 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. Over the most recent three years, SALUS Ljubljana d. d recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although SALUS Ljubljana d. d's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €5.12m. And it impressed us with free cash flow of €19m, being 76% of its EBIT. So is SALUS Ljubljana d. d's debt a risk? It doesn't seem so to us. 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, we've discovered 2 warning signs for SALUS Ljubljana d. d (1 shouldn't be ignored!) that you should be aware of before investing here.

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.