Health Check: How Prudently Does Fermentalg (EPA:FALG) Use Debt?

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. We can see that Fermentalg SA (EPA:FALG) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. 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 Fermentalg

What Is Fermentalg's Net Debt?

The chart below, which you can click on for greater detail, shows that Fermentalg had €16.7m in debt in June 2021; about the same as the year before. However, it does have €22.7m in cash offsetting this, leading to net cash of €6.03m.

A Look At Fermentalg's Liabilities

The latest balance sheet data shows that Fermentalg had liabilities of €8.97m due within a year, and liabilities of €11.9m falling due after that. On the other hand, it had cash of €22.7m and €4.15m worth of receivables due within a year. So it can boast €6.03m 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 ultimately the future profitability of the business will decide if Fermentalg can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Fermentalg wasn't profitable at an EBIT level, but managed to grow its revenue by 7.6%, to €5.0m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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 the fact is that over the last twelve months Fermentalg lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €10m and booked a €7.2m accounting loss. With only €6.03m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Fermentalg you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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