Is AGRANA Beteiligungs-Aktiengesellschaft (VIE:AGR) A Risky Investment?

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.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for AGRANA Beteiligungs-Aktiengesellschaft

What Is AGRANA Beteiligungs-Aktiengesellschaft's Debt?

As you can see below, at the end of August 2022, AGRANA Beteiligungs-Aktiengesellschaft had €770.9m of debt, up from €609.9m a year ago. Click the image for more detail. However, it does have €128.2m in cash offsetting this, leading to net debt of about €642.7m.

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

Zooming in on the latest balance sheet data, we can see that AGRANA Beteiligungs-Aktiengesellschaft had liabilities of €931.4m due within 12 months and liabilities of €466.6m due beyond that. Offsetting this, it had €128.2m in cash and €519.8m in receivables that were due within 12 months. So it has liabilities totalling €750.0m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €990.5m, so it does suggest shareholders should keep an eye on AGRANA Beteiligungs-Aktiengesellschaft's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its 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 a debt to EBITDA ratio of 2.6 and its EBIT covered its interest expense 3.7 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Worse, AGRANA Beteiligungs-Aktiengesellschaft's EBIT was down 32% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, AGRANA Beteiligungs-Aktiengesellschaft recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

We'd go so far as to say AGRANA Beteiligungs-Aktiengesellschaft's EBIT growth rate was disappointing. But at least its net debt to EBITDA is not so bad. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 2 warning signs for AGRANA Beteiligungs-Aktiengesellschaft you should know about.

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.