We think Seeds Voltz (EPA:GRVO) can stay on top of its debt

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a 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 can see that Seeds Voltz SA (EPA:GRVO) uses debt in its business. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) 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. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Voltz Seeds

What is Graines Voltz’s net debt?

The image below, which you can click on for more details, shows that in September 2021, Graines Voltz had a debt of €39.7m, compared to €38.0m in one year. However, because it has a cash reserve of €7.22 million, its net debt is lower, at around €32.5 million.

ENXTPA:GRVO Debt to Equity February 18, 2022

How healthy is the Graines Voltz balance sheet?

We can see from the most recent balance sheet that Graines Voltz had liabilities of 45.2 million euros maturing in one year and liabilities of 20.4 million euros maturing beyond. In return for these bonds, it had cash of €7.22 million as well as receivables worth €36.5 million maturing in less than 12 months. It therefore has liabilities totaling €22.0 million more than its cash and short-term receivables, combined.

Of course, Graines Voltz has a market capitalization of 194.9 million euros, so these liabilities are probably manageable. That said, it is clear that we must continue to monitor its record, lest it deteriorate.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (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 ).

We would say that the moderate net debt/EBITDA ratio of Graines Voltz (i.e. 2.2) indicates prudence in terms of debt. And its strong interest coverage of 38.3 times puts us even more at ease. It should be noted that Graines Voltz’s EBIT has jumped like bamboo after the rain, gaining 95% over the last twelve months. This will make it easier to manage your debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Graines Voltz’s ability to maintain a healthy balance sheet in the future. So if you want to see what the pros think, you might find This free analyst earnings forecast report is interesting.

Finally, while the taxman may love accounting profits, lenders only accept cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Graines Voltz has actually had a cash outflow, overall. Debt is generally more expensive and almost always riskier in the hands of a company with negative free cash flow. Shareholders should hope for an improvement.

Our point of view

Graines Voltz’s interest coverage is a real positive in this analysis, as is its EBIT growth rate. In contrast, our confidence was shaken by its apparent struggle to convert EBIT to free cash flow. In view of all the elements mentioned above, it seems to us that Graines Voltz manages its debt rather well. But be warned: we believe debt levels are high enough to warrant continued monitoring. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 1 warning sign we spotted with Voltz Seeds.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

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.

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