Here's Why AGRANA Beteiligungs-Aktiengesellschaft (VIE:AGR) Has A Meaningful Debt Burden

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 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. Importantly, AGRANA Beteiligungs-Aktiengesellschaft (VIE:AGR) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for AGRANA Beteiligungs-Aktiengesellschaft

How Much Debt Does AGRANA Beteiligungs-Aktiengesellschaft Carry?

You can click the graphic below for the historical numbers, but it shows that as of November 2022 AGRANA Beteiligungs-Aktiengesellschaft had €783.7m of debt, an increase on €614.8m, over one year. However, it also had €74.2m in cash, and so its net debt is €709.5m.

A Look At AGRANA Beteiligungs-Aktiengesellschaft's Liabilities

Zooming in on the latest balance sheet data, we can see that AGRANA Beteiligungs-Aktiengesellschaft had liabilities of €1.29b due within 12 months and liabilities of €411.9m due beyond that. Offsetting these obligations, it had cash of €74.2m as well as receivables valued at €508.3m due within 12 months. So its liabilities total €1.12b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's €1.06b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

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 has net debt to EBITDA of 2.9 suggesting it uses a fair bit of leverage to boost returns. But the high interest coverage of 9.3 suggests it can easily service that debt. Pleasingly, AGRANA Beteiligungs-Aktiengesellschaft is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 116% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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 company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, AGRANA Beteiligungs-Aktiengesellschaft saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Neither AGRANA Beteiligungs-Aktiengesellschaft's ability to convert EBIT to free cash flow nor its level of total liabilities gave us confidence in its ability to take on more debt. But the good news is it seems to be able to grow its EBIT with ease. When we consider all the factors discussed, it seems to us that AGRANA Beteiligungs-Aktiengesellschaft is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - AGRANA Beteiligungs-Aktiengesellschaft has 2 warning signs we think 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. 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.