Health Check: How Prudently Does Borges Agricultural & Industrial Nuts (BME:BAIN) Use Debt?

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. As with many other companies Borges Agricultural & Industrial Nuts, S.A. (BME:BAIN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Borges Agricultural & Industrial Nuts

How Much Debt Does Borges Agricultural & Industrial Nuts Carry?

The chart below, which you can click on for greater detail, shows that Borges Agricultural & Industrial Nuts had €53.0m in debt in November 2020; about the same as the year before. On the flip side, it has €4.26m in cash leading to net debt of about €48.7m.

A Look At Borges Agricultural & Industrial Nuts' Liabilities

The latest balance sheet data shows that Borges Agricultural & Industrial Nuts had liabilities of €42.6m due within a year, and liabilities of €52.6m falling due after that. Offsetting this, it had €4.26m in cash and €13.6m in receivables that were due within 12 months. So it has liabilities totalling €77.3m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €60.6m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Borges Agricultural & Industrial Nuts's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Borges Agricultural & Industrial Nuts had a loss before interest and tax, and actually shrunk its revenue by 15%, to €160m. That's not what we would hope to see.

Caveat Emptor

While Borges Agricultural & Industrial Nuts'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 €6.6m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of €4.2m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. We've identified 2 warning signs with Borges Agricultural & Industrial Nuts (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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. 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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