Is Borges Agricultural & Industrial Nuts (BME:BAIN) Using Debt Sensibly?

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. We can see that Borges Agricultural & Industrial Nuts, S.A. (BME:BAIN) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Borges Agricultural & Industrial Nuts

What Is Borges Agricultural & Industrial Nuts's Debt?

The image below, which you can click on for greater detail, shows that at November 2022 Borges Agricultural & Industrial Nuts had debt of €47.8m, up from €39.0m in one year. However, it does have €2.03m in cash offsetting this, leading to net debt of about €45.8m.

How Strong Is Borges Agricultural & Industrial Nuts' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Borges Agricultural & Industrial Nuts had liabilities of €54.2m due within 12 months and liabilities of €33.8m due beyond that. Offsetting these obligations, it had cash of €2.03m as well as receivables valued at €15.7m due within 12 months. So its liabilities total €70.3m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €72.6m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. 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's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Borges Agricultural & Industrial Nuts produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €4.5m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €7.3m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Borges Agricultural & Industrial Nuts you should be aware of, and 2 of them can't be ignored.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.