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. Above all, BERG Holding SA (WSE: BRH) carries debt. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for BERG Holding
What is the debt of BERG Holding?
The image below, which you can click for more details, shows that in June 2021, BERG Holding had a debt of Z14.0million, compared to Z13.2million in one year. However, he has Z12.5million in cash offsetting this, leading to net debt of around Z146million.
A look at the liabilities of BERG Holding
The most recent balance sheet shows that BERG Holding had liabilities of Z 36.1 million due within one year and liabilities of Z 16.6 million due thereafter. In return, he had z12.5 million in cash and z13.8 million in receivables due within 12 months. Thus, its liabilities total Z 26.4 million more than the combination of its cash and short-term receivables.
This is a mountain of leverage compared to its market cap of Z42.8million. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of BERG Holding 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.
Last year, the turnover of BERG Holding was quite stable and achieved a negative EBIT. While not too bad, we would rather see some growth.
It is important to note that BERG Holding recorded a loss of profit before interest and taxes (EBIT) during the last year. His loss of EBIT was a huge zł4.8m. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. Quite frankly, we think the record is far from up to par, although it could improve over time. For example, we wouldn’t want to see a repeat of last year’s zł1.8m loss. In the meantime, we consider the title to be very risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 4 warning signs we spotted with BERG Holding.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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