Is NutryFarm International (SGX:AZT) 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. As with many other companies NutryFarm International Limited (SGX:AZT) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for NutryFarm International

What Is NutryFarm International's Net Debt?

The chart below, which you can click on for greater detail, shows that NutryFarm International had HK$142.0m in debt in March 2021; about the same as the year before. However, it does have HK$3.78m in cash offsetting this, leading to net debt of about HK$138.2m.

How Strong Is NutryFarm International's Balance Sheet?

According to the last reported balance sheet, NutryFarm International had liabilities of HK$48.3m due within 12 months, and liabilities of HK$126.6m due beyond 12 months. Offsetting these obligations, it had cash of HK$3.78m as well as receivables valued at HK$15.9m due within 12 months. So it has liabilities totalling HK$155.3m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of HK$245.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since NutryFarm International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year NutryFarm International wasn't profitable at an EBIT level, but managed to grow its revenue by 106%, to HK$78m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Even though NutryFarm International managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost HK$6.4m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$9.1m of cash over the last year. So to be blunt we think it is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for NutryFarm International (of which 2 can't be ignored!) you should know about.

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.
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