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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that AGRANA Beteiligungs-Aktiengesellschaft (VIE:AGR) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 AGRANA Beteiligungs-Aktiengesellschaft had €541.9m of debt in November 2020, down from €572.5m, one year before. However, it also had €100.0m in cash, and so its net debt is €441.9m.

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 €569.5m due within 12 months and liabilities of €609.1m due beyond that. Offsetting this, it had €100.0m in cash and €372.8m in receivables that were due within 12 months. So its liabilities total €705.8m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €1.13b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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). 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 fact that its trailing twelve months of EBIT was 8.1 times its interest expenses harmonizes with that theme. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into 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

AGRANA Beteiligungs-Aktiengesellschaft's conversion of EBIT to free cash flow and level of total liabilities definitely weigh on it, in our esteem. But the good news is it seems to be able to grow its EBIT with ease. We think that AGRANA Beteiligungs-Aktiengesellschaft's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. To that end, you should be aware of the 2 warning signs we've spotted with AGRANA Beteiligungs-Aktiengesellschaft .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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