AGRANA Beteiligungs-Aktiengesellschaft (VIE:AGR) Use Of Debt Could Be Considered Risky

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 can see that AGRANA Beteiligungs-Aktiengesellschaft (VIE:AGR) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for AGRANA Beteiligungs-Aktiengesellschaft

How Much Debt Does AGRANA Beteiligungs-Aktiengesellschaft Carry?

The image below, which you can click on for greater detail, shows that AGRANA Beteiligungs-Aktiengesellschaft had debt of €755.1m at the end of May 2024, a reduction from €942.7m over a year. However, it also had €109.7m in cash, and so its net debt is €645.4m.

How Strong Is AGRANA Beteiligungs-Aktiengesellschaft's Balance Sheet?

We can see from the most recent balance sheet that AGRANA Beteiligungs-Aktiengesellschaft had liabilities of €850.7m falling due within a year, and liabilities of €615.6m due beyond that. Offsetting these obligations, it had cash of €109.7m as well as receivables valued at €506.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €850.0m.

When you consider that this deficiency exceeds the company's €687.4m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

AGRANA Beteiligungs-Aktiengesellschaft's debt is 2.7 times its EBITDA, and its EBIT cover its interest expense 4.6 times over. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Shareholders should be aware that AGRANA Beteiligungs-Aktiengesellschaft's EBIT was down 28% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine AGRANA Beteiligungs-Aktiengesellschaft's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, AGRANA Beteiligungs-Aktiengesellschaft's free cash flow amounted to 47% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Mulling over AGRANA Beteiligungs-Aktiengesellschaft's attempt at (not) growing its EBIT, we're certainly not enthusiastic. Having said that, its ability to convert EBIT to free cash flow isn't such a worry. Overall, it seems to us that AGRANA Beteiligungs-Aktiengesellschaft's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with AGRANA Beteiligungs-Aktiengesellschaft .

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.