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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Dekel Agri-Vision plc (LON:DKL) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Dekel Agri-Vision

How Much Debt Does Dekel Agri-Vision Carry?

As you can see below, at the end of June 2023, Dekel Agri-Vision had €32.2m of debt, up from €27.9m a year ago. Click the image for more detail. However, it also had €1.11m in cash, and so its net debt is €31.1m.

A Look At Dekel Agri-Vision's Liabilities

According to the last reported balance sheet, Dekel Agri-Vision had liabilities of €14.1m due within 12 months, and liabilities of €27.4m due beyond 12 months. On the other hand, it had cash of €1.11m and €2.47m worth of receivables due within a year. So it has liabilities totalling €37.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €12.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Dekel Agri-Vision would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dekel Agri-Vision 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 Dekel Agri-Vision had a loss before interest and tax, and actually shrunk its revenue by 7.0%, to €33m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Dekel Agri-Vision produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €587k at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized €4.7m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Dekel Agri-Vision is showing 2 warning signs in our investment analysis , you should know about...

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.