Fermentalg (EPA:ALGAE) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Fermentalg SA (EPA:ALGAE) does carry debt. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Fermentalg Carry?

You can click the graphic below for the historical numbers, but it shows that Fermentalg had €12.6m of debt in December 2024, down from €15.4m, one year before. However, it does have €20.6m in cash offsetting this, leading to net cash of €7.98m.

How Strong Is Fermentalg's Balance Sheet?

We can see from the most recent balance sheet that Fermentalg had liabilities of €10.7m falling due within a year, and liabilities of €7.73m due beyond that. On the other hand, it had cash of €20.6m and €4.76m worth of receivables due within a year. So it actually has €6.96m more liquid assets than total liabilities.

This short term liquidity is a sign that Fermentalg could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Fermentalg has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Fermentalg's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Check out our latest analysis for Fermentalg

Over 12 months, Fermentalg reported revenue of €11m, which is a gain of 183%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Fermentalg?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Fermentalg had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €2.0m of cash and made a loss of €13m. While this does make the company a bit risky, it's important to remember it has net cash of €7.98m. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that Fermentalg has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. We've identified 2 warning signs with Fermentalg (at least 1 which makes us a bit uncomfortable) , 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. 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.