Is AGRANA Beteiligungs-Aktiengesellschaft (VIE:AGR) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies AGRANA Beteiligungs-Aktiengesellschaft (VIE:AGR) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for AGRANA Beteiligungs-Aktiengesellschaft

What Is AGRANA Beteiligungs-Aktiengesellschaft's Net Debt?

The image below, which you can click on for greater detail, shows that AGRANA Beteiligungs-Aktiengesellschaft had debt of €541.9m at the end of November 2020, a reduction from €572.5m over a year. On the flip side, it has €100.0m in cash leading to net debt of about €441.9m.

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

According to the last reported balance sheet, AGRANA Beteiligungs-Aktiengesellschaft had liabilities of €569.5m due within 12 months, and liabilities of €609.1m due beyond 12 months. Offsetting these obligations, it had cash of €100.0m as well as receivables valued at €372.8m due within 12 months. So it has liabilities totalling €705.8m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €1.09b. 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With a debt to EBITDA ratio of 2.3, AGRANA Beteiligungs-Aktiengesellschaft uses debt artfully but responsibly. And the alluring interest cover (EBIT of 8.1 times interest expense) certainly does not do anything to dispel this impression. Importantly, AGRANA Beteiligungs-Aktiengesellschaft grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if AGRANA Beteiligungs-Aktiengesellschaft can strengthen its balance sheet over time. 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 clearly need to look at whether that EBIT is leading to corresponding free cash flow. Considering the last three years, AGRANA Beteiligungs-Aktiengesellschaft actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

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. Looking at all the angles mentioned above, it does seem to us that AGRANA Beteiligungs-Aktiengesellschaft is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, 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. 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.
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