KSG Agro (WSE:KSG) takes some risk with its use of debt
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies KSG Agro SA (WSE:KSG) uses debt. But does this debt worry shareholders?
Why is debt risky?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. 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 when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for KSG Agro
What is KSG Agro’s debt?
The image below, which you can click on for more details, shows that in March 2022, KSG Agro had a debt of $32.6 million, compared to $27.5 million in one year. On the other hand, he has US$939,000 in cash, resulting in a net debt of around US$31.7 million.
How healthy is KSG Agro’s balance sheet?
The latest balance sheet data shows that KSG Agro had liabilities of $18.6 million due within the year, and liabilities of $26.7 million due thereafter. In return, he had USD 939,000 in cash and USD 5.22 million in debt due within 12 months. Thus, its liabilities total $39.2 million more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the $7.32 million enterprise, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. Ultimately, KSG Agro would likely need a significant recapitalization if its creditors demanded repayment.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
KSG Agro has net debt worth 2.3x EBITDA, which isn’t too much, but its interest coverage seems a bit low, with EBIT at just 4.9x interest expense. interests. While that doesn’t worry us too much, it does suggest that interest payments are a bit of a burden. Fortunately, KSG Agro is growing its EBIT faster than former Australian Prime Minister Bob Hawke dropped a yard glass, with a 795% gain over the last twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since KSG Agro will need income to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, a company can only repay its debts with cold hard cash, not with book profits. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past two years, KSG Agro has created free cash flow of 15% of its EBIT, an uninspiring performance. For us, such a low cash conversion creates a bit of paranoia about the ability to extinguish the debt.
Our point of view
We would go so far as to say that the level of total liabilities of KSG Agro is disappointing. But at least it’s decent enough to increase its EBIT; it’s encouraging. Looking at the big picture, it seems clear to us that KSG Agro’s use of debt creates risks for the business. If all goes well, it can pay off, but the downside of this debt is a greater risk of permanent losses. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 4 warning signs for KSG Agro (3 are a little nasty) you should be aware of.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.