These 4 Measures Indicate That AGRANA Beteiligungs-Aktiengesellschaft (VIE:AGR) Is Using Debt Extensively

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that AGRANA Beteiligungs-Aktiengesellschaft (VIE:AGR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

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 at May 2021 AGRANA Beteiligungs-Aktiengesellschaft had debt of €632.6m, up from €594.3m in one year. However, it also had €87.6m in cash, and so its net debt is €545.0m.

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

According to the last reported balance sheet, AGRANA Beteiligungs-Aktiengesellschaft had liabilities of €541.1m due within 12 months, and liabilities of €586.6m due beyond 12 months. Offsetting these obligations, it had cash of €87.6m as well as receivables valued at €412.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €627.3m.

AGRANA Beteiligungs-Aktiengesellschaft has a market capitalization of €1.14b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without 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's net debt is 3.3 times its EBITDA, which is a significant but still reasonable amount of leverage. However, its interest coverage of 10.5 is very high, suggesting that the interest expense on the debt is currently quite low. Importantly, AGRANA Beteiligungs-Aktiengesellschaft's EBIT fell a jaw-dropping 24% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 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. Considering the last three years, AGRANA Beteiligungs-Aktiengesellschaft actually recorded a cash outflow, overall. 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

On the face of it, AGRANA Beteiligungs-Aktiengesellschaft's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. We're quite clear that we consider AGRANA Beteiligungs-Aktiengesellschaft to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. To that end, you should learn about the 2 warning signs we've spotted with AGRANA Beteiligungs-Aktiengesellschaft (including 1 which is a bit concerning) .

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.
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