House of Agriculture Spiroy (ATH: SPIR) Debt use could be considered risky

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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. ” It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that The House of Agriculture Spiroy SA (ATH: SPIR) has debt on its balance sheet. But the most important question is: what risk does this debt create?

When Is Debt a Problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

Discover our latest analysis for Maison de l’Agriculture Spiroy

What is House of Agriculture Spiroy’s net debt?

The image below, which you can click for more details, shows that in June 2021, the Maison de l’Agriculture Spiroy had a debt of € 17.2 million, compared to € 15.8 million in one year. . On the other hand, it has € 1.36 million in cash, leading to a net debt of around € 15.8 million.

ATSE: SPIR History of debt to equity November 7, 2021

How healthy is House of Agriculture Spiroy’s track record?

We can see from the most recent balance sheet that House of Agriculture Spiroy had liabilities of € 26.5 million due within one year, and liabilities of € 3.52 million due beyond. On the other hand, it had cash of € 1.36 million and € 4.97 million in receivables within one year. Its liabilities therefore amount to € 23.7 million more than the combination of its cash and short-term receivables.

The shortfall here hangs over the € 6.23million company itself, as if a child struggles under the weight of a huge backpack full of books, his sports equipment and a trumpet . So we would be watching its record closely, without a doubt. Ultimately, House of Agriculture Spiroy would likely need a major recapitalization if its creditors demanded repayment.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

The shareholders of House of Agriculture Spiroy are faced with the double whammy of a high net debt / EBITDA ratio (10.2) and relatively low interest coverage, since EBIT is only 0.50 times interest charges. The debt burden here is considerable. A buyout factor for House of Agriculture Spiroy is that it turned last year’s EBIT loss into a gain of € 624,000, over the past twelve months. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of House of Agriculture Spiroy 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.

Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent earnings before interest and taxes (EBIT) are backed by free cash flow. During the past year, House of Agriculture Spiroy recorded a significant negative free cash flow in total. While investors no doubt expect this situation to reverse in due course, this clearly means its use of debt is riskier.

Our point of view

To be frank, House of Agriculture Spiroy’s EBIT conversion to free cash flow and its track record of controlling its total liabilities make us rather uncomfortable with its debt levels. That said, his ability to increase his EBIT is not that much of a concern. We believe that the chances that House of Agriculture Spiroy have too much debt are very high. For us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may think differently. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for the Maison de l’Agriculture Spiroy (2 of which don’t sit too well with us!) you should know.

At the end of the day, it’s often best to focus on businesses that don’t have 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 material. Simply Wall St has no position in any of the stocks mentioned.

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