Is Jadroplov dd (ZGSE:JDPL) using too much debt?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Jadroplov dd (ZGSE: JDPL) has debt on its balance sheet. But does this debt worry shareholders?
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Jadroplov dd
What is Jadroplov dd’s net debt?
As you can see below, Jadroplov dd had a debt of 268.4 million kn in March 2022, compared to 301.3 million kn the previous year. On the other hand, he has 33.3 million Kn in cash, resulting in a net debt of around 235.1 million Kn.
A look at the responsibilities of Jadroplov dd
Zooming in on the latest balance sheet data, we can see that Jadroplov dd had liabilities of Kn 115.9 million maturing within 12 months and liabilities of Kn 195.7 million maturing beyond. In return, he had Kn 33.3 million in cash and Kn 20.4 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of K257.9 million.
This deficit casts a shadow over the Kn91.1m society, like a colossus towering above mere mortals. So we definitely think shareholders need to watch this one closely. Ultimately, Jadroplov dd would likely need a major recapitalization if his creditors were to demand repayment.
We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
Jadroplov dd’s net debt is at a very reasonable 2.2 times its EBITDA, while its EBIT covered its interest expense at just 6.3 times last year. While that doesn’t worry us too much, it does suggest that interest payments are a bit of a burden. We also note that Jadroplov dd improved its EBIT from a loss last year to a positive result of 91 million Kn. The balance sheet is clearly the area to focus on when analyzing debt. But it is Jadroplov dd’s income that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. It is therefore important to check how much of its earnings before interest and taxes (EBIT) converts into actual free cash flow. In the most recent year, Jadroplov dd recorded free cash flow of 66% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.
Our point of view
Reflecting on Jadroplov dd’s attempt to stay above his total liabilities, we’re certainly not enthused. But at least it’s decent enough to convert EBIT to free cash flow; it’s encouraging. Once we consider all of the above factors together, it seems to us that Jadroplov dd’s debt makes him a bit risky. Some people like that kind of risk, but we’re aware of the potential pitfalls, so we’d probably prefer it to take on less debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Jadroplov dd you should know.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.