Does Aperam (AMS: APAM) have a healthy track record?
David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We can see that Aperam SA (AMS: APAM) uses debt in its operations. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first look at cash and debt levels, together.
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What is Aperam’s debt?
You can click on the graph below for historical figures, but it shows that Aperam had € 418.0 million in debt in September 2021, up from € 446.0 million a year earlier. However, because it has a cash reserve of € 359.0 million, its net debt is lower, at around € 59.0 million.
How strong is Aperam’s balance sheet?
According to the latest published balance sheet, Aperam had liabilities of 408.0 million euros less than 12 months and liabilities of 687.0 million euros over 12 months. In return, he had € 359.0 million in cash and € 411.0 million in receivables due within 12 months. Its liabilities thus exceed the sum of its cash and its receivables (short term) by € 325.0 million.
Of course, Aperam has a market capitalization of 3.47 billion euros, so this liability is probably manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
With debt at 0.069 times EBITDA and EBIT covering interest 145 times, it’s clear that Aperam is not a desperate borrower. Indeed, compared to his income, his debt seems light as a feather. Best of all, Aperam increased its EBIT by 515% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in the years to come. The balance sheet is clearly the area to focus on when analyzing debt. But it’s future profits, more than anything, that will determine Aperam’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We must therefore clearly examine whether this EBIT leads to the corresponding free cash flow. Over the past three years, Aperam has generated strong free cash flow equivalent to 69% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
The good news is that Aperam’s demonstrated ability to cover interest costs with EBIT delights us like a fluffy puppy does a toddler. And the good news doesn’t end there, because its EBIT growth rate also supports this impression! Considering this range of factors, it seems to us that Aperam is being fairly prudent with its debt, and the risks appear to be well under control. We are therefore not worried about the use of a small leverage on the balance sheet. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. For example, Aperam has 2 warning signs (and 1 which makes us a little uncomfortable) we think you should be aware of.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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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 any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.