Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Miller Industries, Inc. (NYSE:MLR) does carry debt. But should shareholders be worried about its use of debt?
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. 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, 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.
How Much Debt Does Miller Industries Carry?
As you can see below, at the end of June 2019, Miller Industries had US$20.6m of debt, up from US$16.0m a year ago. Click the image for more detail. But it also has US$27.2m in cash to offset that, meaning it has US$6.68m net cash.
How Strong Is Miller Industries's Balance Sheet?
We can see from the most recent balance sheet that Miller Industries had liabilities of US$157.1m falling due within a year, and liabilities of US$23.2m due beyond that. Offsetting these obligations, it had cash of US$27.2m as well as receivables valued at US$197.8m due within 12 months. So it can boast US$44.8m more liquid assets than total liabilities.
This surplus suggests that Miller Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Miller Industries has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Miller Industries has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Miller Industries's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Miller Industries 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. In the last three years, Miller Industries created free cash flow amounting to 16% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
While we empathize with investors who find debt concerning, you should keep in mind that Miller Industries has net cash of US$6.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 35% year-on-year EBIT growth. So we don't think Miller Industries's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Miller Industries insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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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