Is ADL Bionatur Solutions (BME:ADL) Using Too Much Debt?

By
Simply Wall St
Published
November 17, 2021
BME:ADL
Source: Shutterstock

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 note that ADL Bionatur Solutions, S.A. (BME:ADL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ADL Bionatur Solutions

What Is ADL Bionatur Solutions's Debt?

As you can see below, ADL Bionatur Solutions had €4.05m of debt at June 2021, down from €67.9m a year prior. On the flip side, it has €641.5k in cash leading to net debt of about €3.41m.

debt-equity-history-analysis
BME:ADL Debt to Equity History November 18th 2021

How Healthy Is ADL Bionatur Solutions' Balance Sheet?

We can see from the most recent balance sheet that ADL Bionatur Solutions had liabilities of €4.19m falling due within a year, and liabilities of €12.5m due beyond that. Offsetting this, it had €641.5k in cash and €2.12m in receivables that were due within 12 months. So it has liabilities totalling €13.9m more than its cash and near-term receivables, combined.

This deficit isn't so bad because ADL Bionatur Solutions is worth €26.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is ADL Bionatur Solutions'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 ADL Bionatur Solutions managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

Caveat Emptor

Over the last twelve months ADL Bionatur Solutions produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €2.1m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of €2.4m. In the meantime, we consider the stock very risky. 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 ADL Bionatur Solutions is showing 4 warning signs in our investment analysis , you should know about...

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.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.