Is Halcyon Agri (SGX:5VJ) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Halcyon Agri Corporation Limited (SGX:5VJ) does have debt on its balance sheet. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Halcyon Agri

How Much Debt Does Halcyon Agri Carry?

The image below, which you can click on for greater detail, shows that Halcyon Agri had debt of US$1.01b at the end of December 2020, a reduction from US$1.12b over a year. However, it also had US$56.6m in cash, and so its net debt is US$955.0m.

How Strong Is Halcyon Agri's Balance Sheet?

We can see from the most recent balance sheet that Halcyon Agri had liabilities of US$947.6m falling due within a year, and liabilities of US$267.3m due beyond that. On the other hand, it had cash of US$56.6m and US$216.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$941.4m.

This deficit casts a shadow over the US$306.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Halcyon Agri would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Halcyon Agri's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Halcyon Agri made a loss at the EBIT level, and saw its revenue drop to US$1.7b, which is a fall of 10%. We would much prefer see growth.

Caveat Emptor

While Halcyon Agri's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$43m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through US$66m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Halcyon Agri you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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