Backed by Berkshire Hathaway’s Charlie Munger, outside fund manager Li Lu makes no bones about it when he says, “The biggest investment risk isn’t price volatility, it’s whether you will suffer a permanent loss of capital.” So it might be obvious that you need to consider debt when considering how risky a particular stock is, because too much debt can send a company into the abyss. We can see that Argent Industrial Limited (JSE:ART) uses debt in its business. But is that debt a problem for shareholders?
What is the risk of debt?
Debt helps a business until the business struggles to pay it back, either with new capital or free cash flow. Ultimately, if the company fails to meet its legal obligations to pay down debt, shareholders could get away with nothing. While not all that common, we often see leveraged companies permanently diluting shareholders as lenders force them to raise capital at a distressed price. By replacing dilution, however, debt can be an extremely good tool for companies that need capital to invest in growth with high returns. When examining debt, let’s first look at both cash and debt together.
Check out our latest analysis for Argent Industrial
What is Argent Industrial’s debt?
You can click on the chart below to see the historical figures, but it shows that Argent Industrial had debts of R132.9 million as of March 2022, up R100.6 million over one year . But on the other hand, it also has R184.4 million in cash, resulting in a net cash position of R51.5 million.
How strong is Argent Industrial’s balance sheet?
The most recent balance sheet shows that Argent Industrial had debts of R521.2 million maturing within one year and debts of R181.1 million maturing beyond that. On the other hand, it had R184.4 million in cash and R439.2 million in receivables due within a year. Therefore, his liabilities exceed the sum of his cash and (short-term) receivables by R78.7 million.
With Argent Industrial’s publicly traded shares totaling R844.4 million, it seems unlikely that this level of liabilities would pose a major threat. However, we think it’s worth keeping an eye on balance sheet strength as it can change over time. While it has notable liabilities, Argent Industrial also has more cash than debt, so we’re pretty confident it can safely manage its debt.
Additionally, Argent Industrial grew its EBIT by 40% over the trailing 12 months, and that growth will make it easier to manage its debt. Undoubtedly, we learn most about debt from the balance sheet. But it is primarily future earnings that will determine Argent Industrial’s ability to maintain a healthy balance sheet well into the future. So if you focus on the future, you can check this free Analyst earnings forecast report.
After all, a business needs free cash flow to pay off debt; Accounting profits just don’t cut it. Even though Argent Industrial has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and taxes (EBIT) into free cash flow to understand how quickly it’s building (or eroding) that cash. . Balance. Over the past three years, Argent Industrial has reported free cash flow equivalent to 65% of its EBIT, which is about normal since free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to pay off debt if necessary.
While it’s always sensible to look at a company’s total debt, it’s very reassuring to know that Argent Industrial has R51.5 million in net cash. And we liked the sight of last year’s EBIT growth of 40% year over year. So is Argent Industrial’s debt a risk? It doesn’t seem like it to us. Undoubtedly, we learn most about debt from the balance sheet. However, the entire investment risk is not on the balance sheet – far from it. For example, Argent Industrial 1 warning sign We think you should be aware of this.
Ultimately, sometimes it’s easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with no net debt 100% freeat the moment.
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This Simply Wall St article is of a general nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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