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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Haynes International, Inc. (NASDAQ:HAYN) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Haynes International Carry?
As you can see below, at the end of March 2020, Haynes International had US$30.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$52.4m in cash, leading to a US$22.4m net cash position.
How Strong Is Haynes International's Balance Sheet?
According to the last reported balance sheet, Haynes International had liabilities of US$82.9m due within 12 months, and liabilities of US$236.2m due beyond 12 months. Offsetting this, it had US$52.4m in cash and US$66.3m in receivables that were due within 12 months. So it has liabilities totalling US$200.4m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of US$283.2m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Haynes International also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that Haynes International grew its EBIT by 246% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Haynes International 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Haynes International 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. Over the last two years, Haynes International recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Although Haynes 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$22.4m. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in US$23m. So is Haynes International's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Haynes International's dividend history, without delay!
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email firstname.lastname@example.org.
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. Thank you for reading.