Here’s why Golden Agri-Resources (SGX: E5H) has a heavy debt burden


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. It’s only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We can see that Golden Agri-Ressources Ltée (SGX: E5H) uses debt in its business. But the most important question is: what risk does this debt create?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

See our latest analysis for Golden Agri-Ressources

What is the debt of Golden Agri-Resources?

The graph below, which you can click for more details, shows Golden Agri-Resources owed US $ 3.06 billion in debt as of June 2021; about the same as the year before. However, it has US $ 1.04 billion in cash offsetting this, leading to net debt of around US $ 2.02 billion.

SGX: E5H History of debt to equity December 30, 2021

How healthy is Golden Agri-Ressources’ balance sheet?

According to the latest published balance sheet, Golden Agri-Resources had liabilities of US $ 2.81 billion due within 12 months and liabilities of US $ 1.80 billion due beyond 12 months. In compensation for these obligations, he had cash of US $ 1.04 billion as well as receivables valued at US $ 612.0 million maturing within 12 months. Its liabilities therefore total $ 2.96 billion more than the combination of its cash and short-term receivables.

When you consider that this deficit exceeds the company’s $ 2.30 billion market cap, you might well be inclined to take a close look at the balance sheet. In the event that the company were to clean up its balance sheet quickly, it seems likely that shareholders would suffer significant dilution.

We measure a company’s indebtedness relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Golden Agri-Resources’ net debt stands at a very reasonable level of 2.0 times its EBITDA, while its EBIT only covered its interest expense 5.7 times last year. While this doesn’t worry us too much, it does suggest that the interest payments are somewhat of a burden. We also note that Golden Agri-Resources improved its EBIT from a loss last year to a positive amount of US $ 689 million. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Golden Agri-Resources’ ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent profit before interest and taxes (EBIT) is supported by free cash flow. Over the past year, Golden Agri-Resources generated strong free cash flow equivalent to 57% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.

Our point of view

Reflecting on Golden Agri-Resources’ attempt to stay on top of its total liabilities, we are certainly not enthusiastic. But at least it’s pretty decent to convert EBIT into free cash flow; it’s encouraging. Looking at the balance sheet and taking all of these factors into account, we think the debt is making Golden Agri-Resources a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 3 warning signs with Golden Agri-Resources (at least 2 that cannot be ignored), and understanding them should be part of your investment process.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

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 any stock 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.


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