Is Accordant Group (NZSE:AGL) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Accordant Group Limited (NZSE:AGL) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Accordant Group

What Is Accordant Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Accordant Group had NZ$15.0m of debt in March 2021, down from NZ$36.0m, one year before. On the flip side, it has NZ$1.80m in cash leading to net debt of about NZ$13.2m.

A Look At Accordant Group's Liabilities

We can see from the most recent balance sheet that Accordant Group had liabilities of NZ$25.4m falling due within a year, and liabilities of NZ$24.4m due beyond that. Offsetting these obligations, it had cash of NZ$1.80m as well as receivables valued at NZ$23.5m due within 12 months. So its liabilities total NZ$24.6m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Accordant Group is worth NZ$54.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Accordant Group 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, Accordant Group made a loss at the EBIT level, and saw its revenue drop to NZ$205m, which is a fall of 22%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Accordant Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping NZ$15m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of NZ$20m and a profit of NZ$6.2m. So one might argue that there's still a chance it can get things on the right track. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Accordant Group (1 is significant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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