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.' 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 Agra Ventures Ltd. (CSE:AGRA) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Agra Ventures
What Is Agra Ventures's Net Debt?
As you can see below, Agra Ventures had CA$26.7m of debt at March 2021, down from CA$47.3m a year prior. However, it does have CA$2.77m in cash offsetting this, leading to net debt of about CA$23.9m.
A Look At Agra Ventures' Liabilities
According to the last reported balance sheet, Agra Ventures had liabilities of CA$11.7m due within 12 months, and liabilities of CA$25.6m due beyond 12 months. On the other hand, it had cash of CA$2.77m and CA$185.0k worth of receivables due within a year. So its liabilities total CA$34.4m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of CA$48.7m, so it does suggest shareholders should keep an eye on Agra Ventures' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Agra Ventures will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Agra Ventures reported revenue of CA$1.4m, which is a gain of 288%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
Caveat Emptor
While we can certainly appreciate Agra Ventures's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CA$15m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$3.2m in negative free cash flow over the last twelve months. So in short it's a really 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. Case in point: We've spotted 6 warning signs for Agra Ventures you should be aware of, and 2 of them are a bit concerning.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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This article by Simply Wall St is general in nature. 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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About CNSX:DCNN
Medium-low and slightly overvalued.
