Is Granolio dd (ZGSE: GRNL) a risky investment?
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. ” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We note that Granolio dd (ZGSE: GRNL) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its 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. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for Granolio dd
How much debt does Granolio dd have?
The image below, which you can click for more details, shows that Granolio dd had a debt of Kn 206.8 million at the end of June 2021, a reduction from Kn 347.1 million on a year. And he doesn’t have a lot of cash, so his net debt is about the same.
Is Granolio dd’s balance sheet healthy?
According to the latest published balance sheet, Granolio dd had a liability of Kn 133.7 million due within 12 months and a liability of Kn 200.0 million due beyond 12 months. In compensation for these obligations, he had cash of 1.14 million Kn as well as receivables valued at 138.5 million Kn due within 12 months. It therefore has liabilities totaling Kn 194.1 million more than its combined cash and short-term receivables.
This deficit casts a shadow over Kn39.2m society, like a colossus towering above mere mortals. So we would be watching its record closely, without a doubt. After all, Granolio dd would likely need a major recapitalization if it were to pay its creditors today.
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).
Granolio dd has a debt to EBITDA ratio of 2.8, which signals significant debt, but is still fairly reasonable for most types of businesses. But its EBIT was around 19.6 times its interest expense, implying that the company isn’t really paying a high cost to maintain that level of debt. Even if the low cost turned out to be unsustainable, that’s a good sign. Fortunately, Granolio dd is increasing its EBIT faster than former Australian Prime Minister Bob Hawke, posting a gain of 3.891% in the last twelve months. The balance sheet is clearly the area you need to focus on when analyzing debt. But you can’t look at debt in isolation; since Granolio dd will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past two years, Granolio dd’s free cash flow has been 20% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.
Our point of view
Whereas the level of the total liabilities of Granolio dd makes us nervous. For example, its interest coverage and EBIT growth rate give us some confidence in its ability to manage its debt. When we consider all the factors mentioned, it seems to us that Granolio dd is taking risks with its recourse to debt. So while this leverage increases returns on equity, we wouldn’t really want to see it increase from here. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 4 warning signs for Granolio dd you need to be aware, and 3 of them are of concern.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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