Is ORGANIC Farma Zdrowia (WSE:ORG) Weighed On By Its Debt Load?

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.' 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 can see that ORGANIC Farma Zdrowia S.A. (WSE:ORG) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at 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 zł8.57m of debt in September 2020, down from zł14.8m, one year before. On the flip side, it has zł1.70m in cash leading to net debt of about zł6.88m.

How Healthy Is ORGANIC Farma Zdrowia's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ORGANIC Farma Zdrowia had liabilities of zł30.4m due within 12 months and liabilities of zł8.85m due beyond that. On the other hand, it had cash of zł1.70m and zł6.01m worth of receivables due within a year. So its liabilities total zł31.5m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of zł33.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 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, ORGANIC Farma Zdrowia reported revenue of zł103m, which is a gain of 4.3%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months ORGANIC Farma Zdrowia produced an earnings before interest and tax (EBIT) loss. Indeed, it lost zł1.9m at the EBIT level. 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. However, it doesn't help that it burned through zł3.0m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - ORGANIC Farma Zdrowia has 5 warning signs (and 3 which shouldn't be ignored) we think you should know about.

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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