Is Fountain (EBR:FOU) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Fountain S.A. (EBR:FOU) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fountain

What Is Fountain's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Fountain had debt of €10.1m, up from €5.42m in one year. However, it also had €2.24m in cash, and so its net debt is €7.87m.

How Strong Is Fountain's Balance Sheet?

The latest balance sheet data shows that Fountain had liabilities of €9.45m due within a year, and liabilities of €6.03m falling due after that. On the other hand, it had cash of €2.24m and €2.37m worth of receivables due within a year. So it has liabilities totalling €10.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €4.98m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Fountain would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Fountain's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Fountain wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to €21m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Fountain produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable €1.8m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of €576k over the last twelve months. So suffice it to say we consider the stock to be risky. 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. For instance, we've identified 1 warning sign for Fountain that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.