Datalab Tehnologije d.d (LJSE:DATG) Has A Pretty Healthy Balance Sheet

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. We can see that Datalab Tehnologije d.d. (LJSE:DATG) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Datalab Tehnologije d.d

What Is Datalab Tehnologije d.d's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Datalab Tehnologije d.d had debt of €4.35m, up from €3.15m in one year. But it also has €4.72m in cash to offset that, meaning it has €374.3k net cash.

How Healthy Is Datalab Tehnologije d.d's Balance Sheet?

The latest balance sheet data shows that Datalab Tehnologije d.d had liabilities of €5.26m due within a year, and liabilities of €4.34m falling due after that. On the other hand, it had cash of €4.72m and €3.28m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.60m.

Given Datalab Tehnologije d.d has a market capitalization of €10.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Datalab Tehnologije d.d boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Datalab Tehnologije d.d turned things around in the last 12 months, delivering and EBIT of €3.0m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Datalab Tehnologije 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 Datalab Tehnologije 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 last year, Datalab Tehnologije d.d actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Datalab Tehnologije d.d does have more liabilities than liquid assets, it also has net cash of €374.3k. The cherry on top was that in converted 161% of that EBIT to free cash flow, bringing in €4.8m. So we don't think Datalab Tehnologije d.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 Datalab Tehnologije d.d you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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