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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, ORGANIC Farma Zdrowia S.A. (WSE:ORG) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Net Debt?

The image below, which you can click on for greater detail, shows that ORGANIC Farma Zdrowia had debt of zł9.86m at the end of September 2023, a reduction from zł16.9m over a year. However, it also had zł676.0k in cash, and so its net debt is zł9.19m.

How Healthy Is ORGANIC Farma Zdrowia's Balance Sheet?

According to the last reported balance sheet, ORGANIC Farma Zdrowia had liabilities of zł18.2m due within 12 months, and liabilities of zł7.89m due beyond 12 months. On the other hand, it had cash of zł676.0k and zł7.19m worth of receivables due within a year. So it has liabilities totalling zł18.2m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of zł14.9m, we think shareholders really should watch ORGANIC Farma Zdrowia's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is ORGANIC Farma Zdrowia's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year ORGANIC Farma Zdrowia wasn't profitable at an EBIT level, but managed to grow its revenue by 5.1%, to zł107m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, ORGANIC Farma Zdrowia had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping zł2.5m. 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 had negative free cash flow of zł1.2m over the last twelve months. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example ORGANIC Farma Zdrowia has 4 warning signs (and 3 which shouldn't be ignored) we think you should know about.

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. 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.