Is Fountain (EBR:FOU) weighed down by its debt?

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Fontaine S.A. (EBR:FOU) uses debt. But should shareholders worry about its use of debt?

Why is debt risky?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for Fontaine

What is Fountain Debt?

The image below, which you can click on for more details, shows that in December 2021, Fountain had a debt of 10.1 million euros, compared to 5.42 million euros in one year. However, he also had €2.24 million in cash, so his net debt is €7.87 million.

ENXTBR:FOU Debt to Equity History May 5, 2022

How strong is Fountain’s balance sheet?

The latest balance sheet data shows that Fountain had liabilities of €9.45 million due within one year, and liabilities of €6.03 million falling due thereafter. On the other hand, it had €2.24 million in cash and €2.37 million in receivables at less than one year. It therefore has liabilities totaling 10.9 million euros more than its cash and short-term receivables, combined.

This deficit casts a shadow over the €4.98 million company, like a colossus dominating mere mortals. So we definitely think shareholders need to watch this one closely. Ultimately, Fountain would likely need a major recapitalization if its creditors were to demand repayment. There is no doubt that we learn the most about debt from the balance sheet. But it is Fountain’s earnings that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Last year, Fountain was not profitable in terms of EBIT, but managed to increase its turnover by 15%, to 21 million euros. This rate of growth is a bit slow for our liking, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months, Fountain has recorded a loss of earnings before interest and taxes (EBIT). Indeed, it lost a very considerable €1.8 million in terms of EBIT. Considering that, along with the liabilities mentioned above, we are nervous about the business. It would have to quickly improve its functioning so that we are interested in it. Notably because it recorded a negative free cash flow of €576,000 over the last twelve months. So suffice it to say that we consider the stock to be risky. 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 have identified 1 warning sign for Fountain of which you should be aware.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

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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