Is Elektro Maribor d.d (LJSE:EMAG) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Elektro Maribor d.d. (LJSE:EMAG) 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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Elektro Maribor d.d

How Much Debt Does Elektro Maribor d.d Carry?

The image below, which you can click on for greater detail, shows that at December 2022 Elektro Maribor d.d had debt of €60.8m, up from €55.4m in one year. However, because it has a cash reserve of €14.9m, its net debt is less, at about €45.9m.

A Look At Elektro Maribor d.d's Liabilities

The latest balance sheet data shows that Elektro Maribor d.d had liabilities of €27.4m due within a year, and liabilities of €90.5m falling due after that. Offsetting these obligations, it had cash of €14.9m as well as receivables valued at €11.4m due within 12 months. So it has liabilities totalling €91.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €56.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Elektro Maribor d.d would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Elektro Maribor d.d will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Elektro Maribor d.d had a loss before interest and tax, and actually shrunk its revenue by 21%, to €67m. That makes us nervous, to say the least.

Caveat Emptor

While Elektro Maribor d.d's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €3.9m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through €17m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. Be aware that Elektro Maribor d.d is showing 4 warning signs in our investment analysis , and 2 of those can't be ignored...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.