These 4 metrics indicate that Austal (ASX: ASB) is using debt reasonably well
Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Austal Limited (ASX: ASB) uses debt in its business. But does this debt worry shareholders?
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for Austal
What is Austal’s net debt?
As you can see below, Austal was in debt of A $ 147.2 million in June 2021, up from A $ 165.2 million the year before. However, his balance sheet shows that he holds AU $ 346.9 million in cash, so he actually has net cash of AU $ 199.7 million.
How strong is Austal’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Austal had a liability of AU $ 397.6 million due within 12 months and a liability of AU $ 277.8 million beyond. On the other hand, he had A $ 346.9 million in cash and A $ 141.8 million in receivables due within a year. It therefore has liabilities totaling AU $ 186.8 million more than its cash and short-term receivables combined.
While that might sound like a lot, it’s not that bad as Austal has a market cap of A $ 663.5 million, and could therefore likely strengthen its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay your debt. Despite her notable liabilities, Austal has a net cash flow, so it’s fair to say that she doesn’t have a lot of debt!
But the bad news is that Austal has seen its EBIT drop 11% over the past twelve months. If this rate of decline in profits continues, the company could find itself in a difficult situation. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Austal’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 analyst earnings forecast report interesting.
Finally, a business can only repay its debts with hard cash, not with book profits. Austal may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Austal has recorded free cash flow of 97% of its EBIT, which is higher than what we usually expected. This puts him in a very strong position to pay off the debt.
Although Austal has more liabilities than liquid assets, it also has net cash of AU $ 199.7 million. The icing on the cake was that he converted 97% of that EBIT into free cash flow, making A $ 30 million. So we have no problem with Austal’s use of debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Austal has 3 warning signs (and 1 which is significant) we think you should be aware of.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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