Does Alkis H. Hadjikyriacos (Frou Frou Biscuits) (CSE:FBI) Have A Healthy 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.' 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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.

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

What Is Alkis H. Hadjikyriacos (Frou Frou Biscuits)'s Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Alkis H. Hadjikyriacos (Frou Frou Biscuits) had debt of €12.4m, up from €11.7m in one year. On the flip side, it has €1.06m in cash leading to net debt of about €11.3m.

A Look At Alkis H. Hadjikyriacos (Frou Frou Biscuits)'s Liabilities

The latest balance sheet data shows that Alkis H. Hadjikyriacos (Frou Frou Biscuits) had liabilities of €12.9m due within a year, and liabilities of €9.48m falling due after that. Offsetting this, it had €1.06m in cash and €3.50m in receivables that were due within 12 months. So its liabilities total €17.8m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €26.7m, 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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Alkis H. Hadjikyriacos (Frou Frou Biscuits)'s debt is 3.9 times its EBITDA, and its EBIT cover its interest expense 5.1 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Shareholders should be aware that Alkis H. Hadjikyriacos (Frou Frou Biscuits)'s EBIT was down 53% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Alkis H. Hadjikyriacos (Frou Frou Biscuits) created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

Mulling over Alkis H. Hadjikyriacos (Frou Frou Biscuits)'s attempt at (not) growing its EBIT, we're certainly not enthusiastic. But at least its interest cover is not so bad. We're quite clear that we consider Alkis H. Hadjikyriacos (Frou Frou Biscuits) to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Alkis H. Hadjikyriacos (Frou Frou Biscuits) has 4 warning signs (and 1 which is a bit concerning) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.