Is S.C. Avicola Slobozia (BVB:AVSL) Using Too Much Debt?

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 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. We can see that S.C. Avicola Slobozia S.A. (BVB:AVSL) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for S.C. Avicola Slobozia

How Much Debt Does S.C. Avicola Slobozia Carry?

As you can see below, at the end of June 2024, S.C. Avicola Slobozia had RON15.8m of debt, up from RON13.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds RON19.4m in cash, so it actually has RON3.60m net cash.

How Healthy Is S.C. Avicola Slobozia's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that S.C. Avicola Slobozia had liabilities of RON20.9m due within 12 months and liabilities of RON9.07m due beyond that. On the other hand, it had cash of RON19.4m and RON2.36m worth of receivables due within a year. So it has liabilities totalling RON8.20m more than its cash and near-term receivables, combined.

Of course, S.C. Avicola Slobozia has a market capitalization of RON43.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, S.C. Avicola Slobozia also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that S.C. Avicola Slobozia grew its EBIT by 103% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since S.C. Avicola Slobozia 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. S.C. Avicola Slobozia 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. Looking at the most recent three years, S.C. Avicola Slobozia recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although S.C. Avicola Slobozia's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RON3.60m. And we liked the look of last year's 103% year-on-year EBIT growth. So we are not troubled with S.C. Avicola Slobozia's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for S.C. Avicola Slobozia (of which 2 shouldn't be ignored!) 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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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.