AgraFlora Organics International (CSE:AGRA) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that AgraFlora Organics International Inc. (CSE:AGRA) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 AgraFlora Organics International

How Much Debt Does AgraFlora Organics International Carry?

As you can see below, at the end of June 2020, AgraFlora Organics International had CA$32.5m of debt, up from none a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

A Look At AgraFlora Organics International's Liabilities

We can see from the most recent balance sheet that AgraFlora Organics International had liabilities of CA$7.15m falling due within a year, and liabilities of CA$50.2m due beyond that. Offsetting this, it had CA$319.0k in cash and CA$1.41m in receivables that were due within 12 months. So it has liabilities totalling CA$55.6m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CA$44.7m, we think shareholders really should watch AgraFlora Organics International's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AgraFlora Organics International 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.

While it hasn't made a profit, at least AgraFlora Organics International booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Despite the top line growth, AgraFlora Organics International still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$49m at the EBIT level. 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. Not least because it had negative free cash flow of CA$20m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - AgraFlora Organics International has 5 warning signs (and 2 which are a bit unpleasant) we think you should know about.

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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