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’. It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that AgroFresh Solutions, Inc. (NASDAQ:AGFS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
How Much Debt Does AgroFresh Solutions Carry?
As you can see below, AgroFresh Solutions had US$404.6m of debt, at September 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have US$18.7m in cash offsetting this, leading to net debt of about US$385.9m.
A Look At AgroFresh Solutions’s Liabilities
Zooming in on the latest balance sheet data, we can see that AgroFresh Solutions had liabilities of US$60.8m due within 12 months and liabilities of US$456.9m due beyond that. Offsetting this, it had US$18.7m in cash and US$78.6m in receivables that were due within 12 months. So its liabilities total US$420.3m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$119.2m company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt. After all, AgroFresh Solutions would likely require a major re-capitalisation if it had to pay its creditors today. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if AgroFresh Solutions can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, AgroFresh Solutions made a loss at the EBIT level, and saw its revenue drop to US$162m, which is a fall of 9.6%. That’s not what we would hope to see.
Over the last twelve months AgroFresh Solutions produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$3.8m at the EBIT level. 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 since it is low on liquid assets, and made a loss of US$34m in the last year. So while it will probably survive, we think it’s risky; we’d treat it like chicken pox and try to avoid it. 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. For instance, we’ve identified 1 warning sign for AgroFresh Solutions that you should be aware of.
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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