Health Check: How Prudently Does Isagro (BIT:ISG) 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.' 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. We note that Isagro S.p.A. (BIT:ISG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Isagro

What Is Isagro's Debt?

You can click the graphic below for the historical numbers, but it shows that Isagro had €41.0m of debt in June 2020, down from €81.0m, one year before. However, because it has a cash reserve of €8.83m, its net debt is less, at about €32.2m.

How Healthy Is Isagro's Balance Sheet?

According to the last reported balance sheet, Isagro had liabilities of €53.2m due within 12 months, and liabilities of €25.7m due beyond 12 months. Offsetting this, it had €8.83m in cash and €35.7m in receivables that were due within 12 months. So it has liabilities totalling €34.4m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €38.7m, so it does suggest shareholders should keep an eye on Isagro's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Isagro's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Isagro wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to €115m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Isagro had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €8.0m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €12.9m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Case in point: We've spotted 2 warning signs for Isagro you should be aware of.

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. 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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