Here’s why La Forestière Equatoriale (EPA: FORE) can bear some debt

Howard Marks put it right when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk that concerns me … and every investor I practice. know worries. So it seems like smart money knows that debt – which is usually linked to bankruptcies – is a very important factor when you assess the risk of a business. Like many other companies La Forestière Equatoriale SA (EPA: FORE) makes use of debt. But the most important question is: what is the risk that this debt creates?

Why is debt risky?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to issue shares at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

Discover our latest analyzes for La Forestière Equatoriale

What is the debt of La Forestière Equatoriale?

You can click on the graph below for historical figures, but it shows that La Forestière Equatoriale had a debt of XOF 25.6 billion in December 2020, up from XOF 32.2 billion a year earlier. On the other hand, he has XOF 6.26 billion in cash, which leads to a net debt of around XOF 19.4 billion.

ENXTPA: FORE debt / equity history May 24, 2021

How healthy is La Forestière Equatoriale’s balance sheet?

Zooming in on the latest balance sheet data, we can see that La Forestière Equatoriale had a liability of 56.9 billion FCFA within 12 months and a liability of 3.33 billion FCFA beyond. In return for these obligations, he had cash of CFAF 6.26 billion as well as receivables valued at CFAF 7.88 billion within 12 months. It therefore has liabilities totaling XOF 46.0 billion more than its cash and short-term receivables combined.

That’s a mountain of leverage compared to its market cap of XOF 58.9 billion. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at the debt in total isolation; since La Forestière Equatoriale will need revenue to service this debt. So when you consider debt, it’s really worth looking at the profit trend. Click here for an interactive snapshot.

Last year, La Forestière Equatoriale recorded a loss before interest and taxes and actually reduced its turnover by 9.4% to XOF 37 billion. This is not what we hope to see.

Caveat Emptor

Above all, La Forestière Equatoriale has recorded a loss before interest and taxes (EBIT) over the past year. To be precise, the loss of EBIT stood at 280 million XOF. When we look at this and recall the liabilities of its balance sheet, versus the cash flow, it seems unwise to us that the company is in debt. We therefore believe that its record is a bit strained, but not irreparable. For example, we wouldn’t want to see a repeat of last year’s loss of XOF 631 million. So, to be frank, we think it’s risky. 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. These risks can be difficult to spot. Every company has them, and we’ve spotted 1 warning sign for La Forestière Equatoriale you should know.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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Alan Adams

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