Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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 Zarneni Hrani Bulgaria AD (BUL:ZHBG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Zarneni Hrani Bulgaria AD’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that Zarneni Hrani Bulgaria AD had лв44.1m of debt in December 2022, down from лв46.6m, one year before. But it also has лв46.6m in cash to offset that, meaning it has лв2.51m net cash.
A Look At Zarneni Hrani Bulgaria AD’s Liabilities
Zooming in on the latest balance sheet data, we can see that Zarneni Hrani Bulgaria AD had liabilities of лв46.1m due within 12 months and liabilities of лв52.1m due beyond that. On the other hand, it had cash of лв46.6m and лв78.5m worth of receivables due within a year. So it can boast лв26.8m more liquid assets than total liabilities.
This excess liquidity is a great indication that Zarneni Hrani Bulgaria AD’s balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Zarneni Hrani Bulgaria AD has more cash than debt is arguably a good indication that it can manage its debt safely.
It was also good to see that despite losing money on the EBIT line last year, Zarneni Hrani Bulgaria AD turned things around in the last 12 months, delivering and EBIT of лв4.3m. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since Zarneni Hrani Bulgaria AD 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 business needs free cash flow to pay off debt; accounting profits just don’t cut it. While Zarneni Hrani Bulgaria AD 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, Zarneni Hrani Bulgaria AD actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While it is always sensible to investigate a company’s debt, in this case Zarneni Hrani Bulgaria AD has лв2.51m in net cash and a strong balance sheet. The cherry on top was that in converted 417% of that EBIT to free cash flow, bringing in лв18m. So we don’t think Zarneni Hrani Bulgaria AD’s use of debt is risky. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. These risks can be hard to spot. Every company has them, and we’ve spotted 1 warning sign for Zarneni Hrani Bulgaria AD you should know about.
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.
Source: Simply Wall
