Is House of Agriculture Spiroy (ATH:SPIR) Using Too Much 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.' 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. Importantly, The House of Agriculture Spiroy S.A. (ATH:SPIR) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for House of Agriculture Spiroy

How Much Debt Does House of Agriculture Spiroy Carry?

The image below, which you can click on for greater detail, shows that at December 2020 House of Agriculture Spiroy had debt of €16.4m, up from €15.3m in one year. However, it also had €950.9k in cash, and so its net debt is €15.5m.

How Strong Is House of Agriculture Spiroy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that House of Agriculture Spiroy had liabilities of €26.3m due within 12 months and liabilities of €3.98m due beyond that. On the other hand, it had cash of €950.9k and €3.02m worth of receivables due within a year. So it has liabilities totalling €26.3m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €5.13m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, House of Agriculture Spiroy would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since House of Agriculture Spiroy will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, House of Agriculture Spiroy made a loss at the EBIT level, and saw its revenue drop to €13m, which is a fall of 8.5%. We would much prefer see growth.

Caveat Emptor

Importantly, House of Agriculture Spiroy had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €431k. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through €268k in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. We've identified 2 warning signs with House of Agriculture Spiroy (at least 1 which can't be ignored) , 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.

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.