Is Halcyon Agri (SGX:5VJ) 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.' 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. As with many other companies Halcyon Agri Corporation Limited (SGX:5VJ) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Halcyon Agri

What Is Halcyon Agri's Debt?

As you can see below, Halcyon Agri had US$1.01b of debt at December 2020, down from US$1.12b a year prior. On the flip side, it has US$45.7m in cash leading to net debt of about US$965.9m.

How Healthy Is Halcyon Agri's Balance Sheet?

According to the last reported balance sheet, Halcyon Agri had liabilities of US$948.4m due within 12 months, and liabilities of US$267.3m due beyond 12 months. Offsetting these obligations, it had cash of US$45.7m as well as receivables valued at US$249.9m due within 12 months. So it has liabilities totalling US$920.1m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$371.0m 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, Halcyon Agri would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Halcyon Agri 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.

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. Indeed, it lost a very considerable US$39m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of US$54m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Halcyon Agri is showing 3 warning signs in our investment analysis , and 2 of those are significant...

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. 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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