Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that NutryFarm International Limited (SGX:AZT) does use debt in its business. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is NutryFarm International's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 NutryFarm International had HK$138.4m of debt, an increase on HK$93.1m, over one year. On the flip side, it has HK$34.8m in cash leading to net debt of about HK$103.5m.
How Strong Is NutryFarm International's Balance Sheet?
The latest balance sheet data shows that NutryFarm International had liabilities of HK$57.1m due within a year, and liabilities of HK$101.0m falling due after that. On the other hand, it had cash of HK$34.8m and HK$14.7m worth of receivables due within a year. So it has liabilities totalling HK$108.6m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the HK$57.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, NutryFarm International would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. 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 actually shrunk its revenue by 18%, to HK$47m. That's not what we would hope to see.
Not only did NutryFarm International's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$12m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through HK$27m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. For riskier companies like NutryFarm International I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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