Is ORGANIC Farma Zdrowia (WSE:ORG) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that ORGANIC Farma Zdrowia S.A. (WSE:ORG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ORGANIC Farma Zdrowia

What Is ORGANIC Farma Zdrowia's Debt?

You can click the graphic below for the historical numbers, but it shows that ORGANIC Farma Zdrowia had zł6.99m of debt in March 2021, down from zł13.3m, one year before. However, because it has a cash reserve of zł1.90m, its net debt is less, at about zł5.09m.

A Look At ORGANIC Farma Zdrowia's Liabilities

The latest balance sheet data shows that ORGANIC Farma Zdrowia had liabilities of zł34.4m due within a year, and liabilities of zł6.95m falling due after that. Offsetting this, it had zł1.90m in cash and zł7.72m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł31.7m.

When you consider that this deficiency exceeds the company's zł23.4m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ORGANIC Farma Zdrowia will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, ORGANIC Farma Zdrowia made a loss at the EBIT level, and saw its revenue drop to zł100m, which is a fall of 4.3%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months ORGANIC Farma Zdrowia produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping zł6.4m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through zł3.7m in negative free cash flow over the last year. That means it's on the risky side of things. 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. Be aware that ORGANIC Farma Zdrowia is showing 4 warning signs in our investment analysis , and 3 of those make us uncomfortable...

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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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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