Is Dekel Agri-Vision (LON:DKL) Using Debt Sensibly?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Dekel Agri-Vision plc (LON:DKL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Dekel Agri-Vision

What Is Dekel Agri-Vision's Debt?

The chart below, which you can click on for greater detail, shows that Dekel Agri-Vision had €17.2m in debt in June 2020; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Dekel Agri-Vision's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dekel Agri-Vision had liabilities of €7.27m due within 12 months and liabilities of €13.0m due beyond that. Offsetting these obligations, it had cash of €317.0k as well as receivables valued at €671.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €19.3m.

When you consider that this deficiency exceeds the company's €13.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Dekel Agri-Vision'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.

In the last year Dekel Agri-Vision'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 Dekel Agri-Vision produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €970k at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of €2.5m over the last twelve months. So suffice it to say we consider the stock to be 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. Take risks, for example - Dekel Agri-Vision has 5 warning signs (and 2 which are concerning) we think you should know about.

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.

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