Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Agora S.A. (WSE:AGO) does carry debt. 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. 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, 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 Agora
What Is Agora's Debt?
As you can see below, Agora had zł77.4m of debt at March 2024, down from zł140.9m a year prior. But on the other hand it also has zł118.8m in cash, leading to a zł41.4m net cash position.
How Healthy Is Agora's Balance Sheet?
The latest balance sheet data shows that Agora had liabilities of zł558.1m due within a year, and liabilities of zł630.3m falling due after that. Offsetting these obligations, it had cash of zł118.8m as well as receivables valued at zł222.3m due within 12 months. So its liabilities total zł847.3m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the zł436.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Agora would probably need a major re-capitalization if its creditors were to demand repayment. Given that Agora has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.
Notably, Agora made a loss at the EBIT level, last year, but improved that to positive EBIT of zł76m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Agora 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Agora may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Agora actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
Although Agora's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł41.4m. The cherry on top was that in converted 277% of that EBIT to free cash flow, bringing in zł212m. So although we see some areas for improvement, we're not too worried about Agora's balance sheet. Over time, share prices tend to follow earnings per share, so if you're interested in Agora, you may well want to click here to check an interactive graph of its earnings per share history.
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.
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About WSE:AGO
Agora
Primarily engages in publishing magazines, periodicals, and books in Poland.
Acceptable track record and slightly overvalued.
