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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that AirBoss of America Corp. (TSE:BOS) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is AirBoss of America's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 AirBoss of America had US$77.3m of debt, an increase on US$59.6m, over one year. But on the other hand it also has US$87.0m in cash, leading to a US$9.72m net cash position.
How Healthy Is AirBoss of America's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that AirBoss of America had liabilities of US$102.7m due within 12 months and liabilities of US$70.1m due beyond that. On the other hand, it had cash of US$87.0m and US$69.4m worth of receivables due within a year. So it has liabilities totalling US$16.4m more than its cash and near-term receivables, combined.
This state of affairs indicates that AirBoss of America's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$899.1m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, AirBoss of America boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that AirBoss of America grew its EBIT by 355% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if AirBoss of America can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While AirBoss of America has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, AirBoss of America produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to look at a company's total liabilities, it is very reassuring that AirBoss of America has US$9.72m in net cash. And we liked the look of last year's 355% year-on-year EBIT growth. So we don't think AirBoss of America's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for AirBoss of America you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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