Health Check: How Prudently Does BG Agro AD (BUL:BGAG) Use Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, BG Agro AD (BUL:BGAG) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for BG Agro AD

How Much Debt Does BG Agro AD Carry?

The image below, which you can click on for greater detail, shows that BG Agro AD had debt of лв41.9m at the end of December 2023, a reduction from лв60.2m over a year. And it doesn't have much cash, so its net debt is about the same.

A Look At BG Agro AD's Liabilities

We can see from the most recent balance sheet that BG Agro AD had liabilities of лв44.6m falling due within a year, and liabilities of лв17.1m due beyond that. On the other hand, it had cash of лв248.0k and лв6.71m worth of receivables due within a year. So its liabilities total лв54.8m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of лв37.7m, we think shareholders really should watch BG Agro AD's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is BG Agro AD'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 BG Agro AD's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months BG Agro AD produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping лв5.0m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of лв5.3m. And until that time we think this is a risky stock. 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. Be aware that BG Agro AD is showing 5 warning signs in our investment analysis , and 1 of those is potentially serious...

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.