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 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. As with many other companies Agat Ejendomme A/S (CPH:AGAT) makes use of debt. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. 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. 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.
Check out our latest analysis for Agat Ejendomme
How Much Debt Does Agat Ejendomme Carry?
The image below, which you can click on for greater detail, shows that Agat Ejendomme had debt of kr.876.0m at the end of April 2021, a reduction from kr.975.4m over a year. However, it does have kr.58.6m in cash offsetting this, leading to net debt of about kr.817.4m.
How Healthy Is Agat Ejendomme's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Agat Ejendomme had liabilities of kr.547.6m due within 12 months and liabilities of kr.476.5m due beyond that. Offsetting these obligations, it had cash of kr.58.6m as well as receivables valued at kr.44.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr.920.7m.
This deficit casts a shadow over the kr.265.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Agat Ejendomme would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Agat Ejendomme's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Agat Ejendomme had a loss before interest and tax, and actually shrunk its revenue by 66%, to kr.119m. To be frank that doesn't bode well.
Caveat Emptor
While Agat Ejendomme's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping kr.50m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of kr.136m in the last year. So while it's not wise to assume the company will fail, we do think it's 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. For instance, we've identified 3 warning signs for Agat Ejendomme (1 is potentially serious) you should be aware of.
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.
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About CPSE:AGAT
Good value with mediocre balance sheet.
