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

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies ORGANIC Farma Zdrowia S.A. (WSE:ORG) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ORGANIC Farma Zdrowia

How Much Debt Does ORGANIC Farma Zdrowia Carry?

You can click the graphic below for the historical numbers, but it shows that ORGANIC Farma Zdrowia had zł15.7m of debt in December 2021, down from zł19.3m, one year before. But on the other hand it also has zł18.8m in cash, leading to a zł3.05m net cash position.

How Strong Is ORGANIC Farma Zdrowia's Balance Sheet?

According to the last reported balance sheet, ORGANIC Farma Zdrowia had liabilities of zł32.1m due within 12 months, and liabilities of zł9.09m due beyond 12 months. On the other hand, it had cash of zł18.8m and zł6.21m worth of receivables due within a year. So it has liabilities totalling zł16.2m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of zł21.5m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, ORGANIC Farma Zdrowia boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year ORGANIC Farma Zdrowia had a loss before interest and tax, and actually shrunk its revenue by 2.4%, to zł100m. We would much prefer see growth.

So How Risky Is ORGANIC Farma Zdrowia?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months ORGANIC Farma Zdrowia lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of zł5.7m and booked a zł14m accounting loss. However, it has net cash of zł3.05m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 3 warning signs for ORGANIC Farma Zdrowia (2 don't sit too well with us) you should be aware of.

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. 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.