Agfa-Gevaert (EBR:AGFB) Has A Somewhat Strained Balance Sheet

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 can see that Agfa-Gevaert NV (EBR:AGFB) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Agfa-Gevaert

How Much Debt Does Agfa-Gevaert Carry?

You can click the graphic below for the historical numbers, but it shows that Agfa-Gevaert had €14.0m of debt in September 2020, down from €357.0m, one year before. However, it does have €631.0m in cash offsetting this, leading to net cash of €617.0m.

How Strong Is Agfa-Gevaert's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Agfa-Gevaert had liabilities of €595.0m due within 12 months and liabilities of €1.01b due beyond that. On the other hand, it had cash of €631.0m and €490.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €488.0m.

This is a mountain of leverage relative to its market capitalization of €579.6m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Agfa-Gevaert boasts net cash, so it's fair to say it does not have a heavy debt load!

If Agfa-Gevaert can keep growing EBIT at last year's rate of 14% over the last year, then it will find its debt load easier to manage. 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 Agfa-Gevaert 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. While Agfa-Gevaert has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Agfa-Gevaert burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

Although Agfa-Gevaert's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €617.0m. And it also grew its EBIT by 14% over the last year. So while Agfa-Gevaert does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Agfa-Gevaert that you should be aware of.

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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