The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Ardmore Shipping Corporation (NYSE:ASC) makes use of debt. But should shareholders be worried about its use of debt?
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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Ardmore Shipping's Debt?
The chart below, which you can click on for greater detail, shows that Ardmore Shipping had US$447.6m in debt in March 2019; about the same as the year before. However, it also had US$52.3m in cash, and so its net debt is US$395.3m.
How Healthy Is Ardmore Shipping's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Ardmore Shipping had liabilities of US$61.9m due within 12 months and liabilities of US$410.0m due beyond that. Offsetting these obligations, it had cash of US$52.3m as well as receivables valued at US$28.4m due within 12 months. So it has liabilities totalling US$391.3m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the US$253.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt At the end of the day, Ardmore Shipping would probably need a major re-capitalization if its creditors were to demand repayment. 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 Ardmore Shipping can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Ardmore Shipping reported revenue of US$222m, which is a gain of 13%. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, Ardmore Shipping had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost US$5.9m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of-US$46.9m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. For riskier companies like Ardmore Shipping I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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