Kencana Agri (SGX: BNE) has a somewhat strained record
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. Above all, Kencana Agri Limited (SGX: BNE) is in debt. But does this debt concern shareholders?
When Is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. 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 look at debt levels, we first consider both liquidity and debt levels.
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What is Kencana Agri’s debt?
As you can see below, Kencana Agri had a debt of US $ 240.3 million in June 2021, up from US $ 250.4 million the year before. However, he also had $ 15.5 million in cash, so his net debt is $ 224.8 million.
Is Kencana Agri’s balance sheet healthy?
Zooming in on the latest balance sheet data, we can see that Kencana Agri had liabilities of US $ 116.5 million due within 12 months and US $ 194.3 million liabilities beyond. In compensation for these obligations, it had cash of US $ 15.5 million as well as receivables valued at US $ 35.1 million maturing within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 260.3 million.
The lack here weighs heavily on the $ 35.0million business itself, as if a child struggles under the weight of a huge backpack full of books, his gym gear, and a trumpet. . We therefore believe that shareholders should watch it closely. Ultimately, Kencana Agri would likely need a major recapitalization if its creditors demanded repayment.
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 Kencana Agri’s debt / EBITDA ratio (4.3) suggests that it is using some debt, its interest coverage is very low at 2.4, which suggests high leverage. Shareholders should therefore probably be aware that interest charges seem to have had a real impact on the company in recent times. The good news is that Kencana Agri has increased its EBIT by 43% over the past twelve months. Like a mother’s loving embrace of a newborn, this type of growth builds resilience, putting the business in a stronger position to manage debt. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Kencana Agri 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, a business needs free cash flow to repay its debts; accounting profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Kencana Agri has actually generated more free cash flow than EBIT. There is nothing better than cash flow to stay in the good graces of your lenders.
Our point of view
Whereas Kencana Agri’s total liability level makes us nervous. Its conversion of EBIT to free cash flow and the growth rate of EBIT were encouraging signs. Taking the above factors together, we believe that Kencana Agri’s debt presents certain risks to the business. 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. To this end, you should inquire about the 3 warning signs we spotted with Kencana Agri (including 2 that make us uncomfortable).
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 the mentioned stocks.
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