Does ADL Bionatur Solutions (BME: ADL) use too much debt?

Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. When we think about how risky a business is, we always like to look at its use of debt, because overloading debt can lead to bankruptcy. We note that ADL Bionatur Solutions, SA (BME: ADL) has debt on its balance sheet. But the most important question is: what risk does this debt create?

When Is Debt a Problem?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first look at cash and debt levels, together.

Check out our latest review for ADL Bionatur Solutions

What is the debt of ADL Bionatur Solutions?

As you can see below, ADL Bionatur Solutions had a debt of 4.05 million euros in June 2021, up from 67.9 million euros the previous year. On the other hand, it has 641.5 K € in cash, leading to a net debt of around 3.41 M €.

BME’s debt to equity history: ADL November 18, 2021

How healthy is ADL Bionatur Solutions’ balance sheet?

It can be seen from the most recent balance sheet that ADL Bionatur Solutions had a liability of € 4.19m maturing within one year, and a liability of € 12.5m maturing beyond. In return, he had € 641.5K in cash and € 2.12M in receivables due within 12 months. It therefore has a total liability of € 13.9 million more than its combined cash and short-term receivables.

This deficit is not that serious because ADL Bionatur Solutions is worth € 26.1 million, and could therefore probably raise enough capital to consolidate its balance sheet, if necessary. However, it is always worth taking a close look at your ability to repay your debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is the results of ADL Bionatur Solutions that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Over the past year, ADL Bionatur Solutions has managed to generate its first revenue as a listed company, but given the lack of profits, shareholders are no doubt hoping to see big increases.

Emptor Warning

During the last twelve months, ADL Bionatur Solutions has made a profit before interest and taxes (EBIT). Indeed, it lost € 2.1 million in terms of EBIT. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. Quite frankly, we believe the record is far from up to par, although it could improve over time. For example, we would not want to see a repeat of the loss of 2.4 million euros from last year. In the meantime, we consider the title to be very risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Note that ADL Bionatur Solutions displays 4 warning signs in our investment analysis , you must know…

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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