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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 ATN International, Inc. (NASDAQ:ATNI) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is ATN International's Debt?
As you can see below, ATN International had US$72.8m of debt at December 2020, down from US$86.4m a year prior. However, it does have US$103.9m in cash offsetting this, leading to net cash of US$31.1m.
How Healthy Is ATN International's Balance Sheet?
The latest balance sheet data shows that ATN International had liabilities of US$147.9m due within a year, and liabilities of US$181.4m falling due after that. Offsetting these obligations, it had cash of US$103.9m as well as receivables valued at US$47.9m due within 12 months. So it has liabilities totalling US$177.6m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since ATN International has a market capitalization of US$750.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, ATN International boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that ATN International has boosted its EBIT by 56%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ATN International's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. ATN International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, ATN International saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Although ATN International's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$31.1m. And we liked the look of last year's 56% year-on-year EBIT growth. So we don't have any problem with ATN International's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for ATN International that you should be aware of.
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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