Does Granolio dd (ZGSE:GRNL) use too much debt?
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We notice that Granolio dd (ZGSE:GRNL) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
What risk does debt carry?
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 common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.
Discover our latest analysis for Granolio dd
What is Granolio dd’s net debt?
The image below, which you can click on for more details, shows that Granolio dd had a debt of Kn 213.4 million at the end of September 2021, a reduction from Kn 343.1 million year on year. Net debt is about the same, since she doesn’t have a lot of cash.
A look at the responsibilities of Granolio dd
Zooming in on the latest balance sheet data, we can see that Granolio dd had liabilities of 157.9 million Kn due within 12 months and liabilities of 202.3 million Kn due beyond. In return, he had 3.74 million Kn in cash and 155.6 million Kn in debt due within 12 months. Thus, its liabilities total Kn 200.9 million more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the company itself, 75.7 million kn, like a child struggling under the weight of a huge backpack full of books, his sports equipment and a trumpet . We would therefore be watching his balance sheet closely, no doubt. After all, Granolio dd would likely need a major recapitalization if it were to pay its creditors today.
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 ).
Granolio dd’s net debt is 2.7 times its EBITDA, which represents a significant but still reasonable leverage effect. However, its interest coverage of 20.0 is very high, suggesting that interest charges on debt are currently quite low. Pleasantly, Granolio dd is growing its EBIT faster than former Australian Prime Minister Bob Hawke dropped a yard glass, with a 1,546% gain over the last twelve months. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Granolio dd that will influence the balance sheet in the future. 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. We therefore always check how much of this EBIT is converted into free cash flow. Over the past two years, Granolio dd has burned a lot of cash. While this may be the result of spending for growth, it makes debt much riskier.
Our point of view
At first glance, Granolio dd’s EBIT to free cash flow conversion left us hesitant about the stock, and its level of total liabilities was no more appealing than the single empty restaurant on the busiest night of the year. ‘year. But on the bright side, its interest coverage is a good sign and makes us more optimistic. Overall, we think it’s fair to say that Granolio dd has enough debt that there are real risks around the balance sheet. If all goes well, this should boost returns, but on the other hand, the risk of permanent capital loss is increased by debt. 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 found 4 warning signs for Granolio dd (2 doesn’t sit too well with us!) which you should be aware of before investing here.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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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.