These 4 Measures Indicate That Alkis H. Hadjikyriacos (Frou Frou Biscuits) (CSE:FBI) Is Using Debt Extensively

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Alkis H. Hadjikyriacos (Frou Frou Biscuits) Public Ltd. (CSE:FBI) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

The chart below, which you can click on for greater detail, shows that Alkis H. Hadjikyriacos (Frou Frou Biscuits) had €11.9m in debt in June 2022; about the same as the year before. On the flip side, it has €1.61m in cash leading to net debt of about €10.3m.

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 €12.3m due within a year, and liabilities of €9.68m falling due after that. On the other hand, it had cash of €1.61m and €4.48m worth of receivables due within a year. So its liabilities total €15.9m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €24.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (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) has net debt to EBITDA of 2.9 suggesting it uses a fair bit of leverage to boost returns. But the high interest coverage of 8.8 suggests it can easily service that debt. Shareholders should be aware that Alkis H. Hadjikyriacos (Frou Frou Biscuits)'s EBIT was down 29% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Alkis H. Hadjikyriacos (Frou Frou Biscuits) 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Alkis H. Hadjikyriacos (Frou Frou Biscuits) produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Alkis H. Hadjikyriacos (Frou Frou Biscuits)'s EBIT growth rate was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. For example its conversion of EBIT to free cash flow was refreshing. We think that Alkis H. Hadjikyriacos (Frou Frou Biscuits)'s debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Alkis H. Hadjikyriacos (Frou Frou Biscuits) is showing 5 warning signs in our investment analysis , and 2 of those 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. 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.