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.' 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. We note that Agora S.A. (WSE:AGO) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Agora's Debt?
You can click the graphic below for the historical numbers, but it shows that Agora had zł102.7m of debt in December 2021, down from zł138.0m, one year before. But on the other hand it also has zł134.9m in cash, leading to a zł32.2m net cash position.
A Look At Agora's Liabilities
The latest balance sheet data shows that Agora had liabilities of zł446.7m due within a year, and liabilities of zł694.3m falling due after that. Offsetting these obligations, it had cash of zł134.9m as well as receivables valued at zł161.2m due within 12 months. So its liabilities total zł844.9m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the zł263.2m company, like a colossus towering over mere mortals. 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. Agora boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Agora can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Agora wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to zł966m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Agora?
Although Agora had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of zł77m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Agora , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.