Does Alkis H. Hadjikyriacos (Frou Frou Biscuits) (CSE:FBI) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Alkis H. Hadjikyriacos (Frou Frou Biscuits) Public Ltd. (CSE:FBI) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Alkis H. Hadjikyriacos (Frou Frou Biscuits)

How Much Debt Does Alkis H. Hadjikyriacos (Frou Frou Biscuits) Carry?

As you can see below, Alkis H. Hadjikyriacos (Frou Frou Biscuits) had €11.7m of debt at December 2020, down from €13.2m a year prior. However, it also had €1.31m in cash, and so its net debt is €10.4m.

How Strong Is Alkis H. Hadjikyriacos (Frou Frou Biscuits)'s Balance Sheet?

The latest balance sheet data shows that Alkis H. Hadjikyriacos (Frou Frou Biscuits) had liabilities of €8.24m due within a year, and liabilities of €13.7m falling due after that. Offsetting this, it had €1.31m in cash and €3.95m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €16.7m.

This deficit is considerable relative to its market capitalization of €27.7m, so it does suggest shareholders should keep an eye on Alkis H. Hadjikyriacos (Frou Frou Biscuits)'s use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Alkis H. Hadjikyriacos (Frou Frou Biscuits) has a debt to EBITDA ratio of 2.7 and its EBIT covered its interest expense 6.3 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. If Alkis H. Hadjikyriacos (Frou Frou Biscuits) can keep growing EBIT at last year's rate of 12% 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 it is Alkis H. Hadjikyriacos (Frou Frou Biscuits)'s earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Alkis H. Hadjikyriacos (Frou Frou Biscuits) saw substantial negative free cash flow, in total. 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.

Our View

We'd go so far as to say Alkis H. Hadjikyriacos (Frou Frou Biscuits)'s conversion of EBIT to free cash flow was disappointing. But at least it's pretty decent at growing its EBIT; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Alkis H. Hadjikyriacos (Frou Frou Biscuits) stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Alkis H. Hadjikyriacos (Frou Frou Biscuits) has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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