Rock star Growth Puts Fermentalg (EPA:ALGAE) In A Position To Use Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Fermentalg SA (EPA:ALGAE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Fermentalg

How Much Debt Does Fermentalg Carry?

You can click the graphic below for the historical numbers, but it shows that Fermentalg had €14.0m of debt in June 2024, down from €17.3m, one year before. However, it does have €21.3m in cash offsetting this, leading to net cash of €7.27m.

How Healthy Is Fermentalg's Balance Sheet?

According to the last reported balance sheet, Fermentalg had liabilities of €7.76m due within 12 months, and liabilities of €9.62m due beyond 12 months. Offsetting these obligations, it had cash of €21.3m as well as receivables valued at €5.29m due within 12 months. So it actually has €9.18m more liquid assets than total liabilities.

This excess liquidity suggests that Fermentalg is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. 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 ultimately the future profitability of the business will decide if Fermentalg can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Fermentalg wasn't profitable at an EBIT level, but managed to grow its revenue by 69%, to €8.0m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Fermentalg?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Fermentalg had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €5.6m and booked a €14m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of €7.27m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Fermentalg may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example, we've discovered 4 warning signs for Fermentalg (1 can't be ignored!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.