Austal (ASX:ASB) Seems To Use Debt Rather Sparingly
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Austal Limited (ASX:ASB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Austal
What Is Austal's Debt?
As you can see below, Austal had AU$167.0m of debt at December 2019, down from AU$174.6m a year prior. But on the other hand it also has AU$274.6m in cash, leading to a AU$107.6m net cash position.
How Healthy Is Austal's Balance Sheet?
According to the last reported balance sheet, Austal had liabilities of AU$331.8m due within 12 months, and liabilities of AU$265.7m due beyond 12 months. Offsetting these obligations, it had cash of AU$274.6m as well as receivables valued at AU$109.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$213.1m.
While this might seem like a lot, it is not so bad since Austal has a market capitalization of AU$1.04b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Austal also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Austal has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Austal's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Austal 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 most recent three years, Austal recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While Austal does have more liabilities than liquid assets, it also has net cash of AU$107.6m. And it impressed us with its EBIT growth of 47% over the last year. So is Austal's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Austal is showing 1 warning sign in our investment analysis , you should know about...
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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