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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that AGRANA Beteiligungs-Aktiengesellschaft (VIE:AGR) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its 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 May 2022, AGRANA Beteiligungs-Aktiengesellschaft had €670.3m of debt, up from €632.6m a year ago. Click the image for more detail. However, it also had €90.1m in cash, and so its net debt is €580.2m.

A Look At AGRANA Beteiligungs-Aktiengesellschaft's Liabilities

We can see from the most recent balance sheet that AGRANA Beteiligungs-Aktiengesellschaft had liabilities of €833.9m falling due within a year, and liabilities of €466.6m due beyond that. Offsetting this, it had €90.1m in cash and €486.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €724.2m.

This deficit is considerable relative to its market capitalization of €937.3m, 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

AGRANA Beteiligungs-Aktiengesellschaft's net debt is 2.6 times its EBITDA, which is a significant but still reasonable amount of leverage. But its EBIT was about 11.8 times its interest expense, implying the company isn't really paying a high cost to maintain that level of debt. Even were the low cost to prove unsustainable, that is a good sign. It is well worth noting that AGRANA Beteiligungs-Aktiengesellschaft's EBIT shot up like bamboo after rain, gaining 98% in the last twelve months. That'll make it easier to manage its debt. 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 the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, AGRANA Beteiligungs-Aktiengesellschaft recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

AGRANA Beteiligungs-Aktiengesellschaft's EBIT growth rate was a real positive on this analysis, as was its interest cover. Having said that, its level of total liabilities somewhat sensitizes us to potential future risks to the balance sheet. Looking at all this data makes us feel a little cautious about AGRANA Beteiligungs-Aktiengesellschaft's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. To that end, you should learn about the 4 warning signs we've spotted with AGRANA Beteiligungs-Aktiengesellschaft (including 2 which are a bit unpleasant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.