Share Dilution

Does Aries Agro (NSE: ARIES) have a healthy balance sheet?


[ad_1]

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 debt overload can lead to bankruptcy. Like many other companies Aries Agro Limited (NSE: ARIES) uses debt. But the real question is whether this debt makes the business risky.

When Is Debt a Problem?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest analysis for Aries Agro

What is Aries Agro’s net debt?

As you can see below, Aries Agro had a debt of 1.40 billion yen in March 2021, up from 1.50 billion yen the previous year. However, given that it has a cash reserve of 41.0 million yen, its net debt is less, at around 1.36 billion yen.

History of debt to equity of NSEI: ARIES July 17, 2021

A look at the liabilities of Aries Agro

According to the latest published balance sheet, Aries Agro had liabilities of 2.59 billion yen due within 12 months and liabilities of 238.6 million yen due beyond 12 months. In return, he had 41.0 million in cash and 1.23 million in receivables due within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 1.56.

This deficit is sizable compared to its market capitalization of 2.23 billion yen, so he suggests shareholders keep an eye on Aries Agro’s use of debt. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.

While Aries Agro has a very reasonable net debt to EBITDA ratio of 2.4, its interest coverage appears low at 1.9. This makes us wonder if the company pays high interest because it is considered risky. Either way, there’s no doubt that the stock uses significant leverage. It should be noted that Aries Agro’s EBIT has soared like bamboo after the rain, gaining 36% in the past twelve months. This will make it easier to manage your debt. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of Aries Agro that will influence the balance sheet in the future. So, if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.

Finally, a business can only pay off its debts with hard cash, not with book profits. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Aries Agro has recorded free cash flow of 93% of its EBIT, which is higher than what we usually expected. This puts him in a very strong position to pay off the debt.

Our point of view

Aries Agro’s ability to convert EBIT into free cash flow and its EBIT growth rate have reinforced our ability to manage its debt. On the other hand, our confidence was undermined by his apparent struggle to cover his interest charges with his EBIT. When we consider all the elements mentioned above, it seems to us that Aries Agro is managing its debt quite well. But beware: we believe debt levels are high enough to warrant continued monitoring. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 4 warning signs for Aries Agro (1 of which is potentially serious!) that you should be aware of.

If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.

Promoted
When trading Aries Agro or any other investment, use the platform considered by many to be the gateway for professionals to the global market, Interactive Brokers. You get the cheapest * trading on stocks, options, futures, forex, bonds and funds from around the world from a single integrated account.

This Simply Wall St article is general in nature. 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 any of the stocks mentioned.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020

Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.

[ad_2]

Leave a Reply

Your email address will not be published.