David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that AMREP Corporation (NYSE:AXR) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does AMREP Carry?
The image below, which you can click on for greater detail, shows that AMREP had debt of US$1.32m at the end of April 2019, a reduction from US$1.84m over a year. But it also has US$13.3m in cash to offset that, meaning it has US$11.9m net cash.
How Healthy Is AMREP's Balance Sheet?
According to the last reported balance sheet, AMREP had liabilities of US$2.96m due within 12 months, and liabilities of US$7.72m due beyond 12 months. On the other hand, it had cash of US$13.3m and US$283.0k worth of receivables due within a year. So it actually has US$2.87m more liquid assets than total liabilities.
This short term liquidity is a sign that AMREP could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, AMREP boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is AMREP's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year AMREP managed to grow its revenue by 44%, to US$13m. With any luck the company will be able to grow its way to profitability.
So How Risky Is AMREP?
While AMREP lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$584k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 44% is a good sign. We'd see further strong growth as an optimistic indication. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how AMREP's profit, revenue, and operating cashflow have changed over the last few years.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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