David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Albany International Corp. (NYSE: AIN) uses debt in its business. But does this debt worry shareholders?
When is debt a problem?
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. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
What is Albany International’s net debt?
The image below, which you can click for more details, shows that Albany International had a debt of US $ 357.6 million at the end of September 2021, a reduction from US $ 432.4 million. US dollars over one year. On the other hand, it has $ 286.2 million in cash, resulting in net debt of around $ 71.4 million.
NYSE Debt vs. Equity History: AIN November 18, 2021
How strong is Albany International’s balance sheet?
The latest balance sheet data shows that Albany International had debts of $ 181.5 million maturing within one year, and debts of $ 478.4 million maturing thereafter. In return, he had $ 286.2 million in cash and $ 315.0 million in receivables due within 12 months. Its liabilities therefore total US $ 58.6 million more than the combination of its cash and short-term receivables.
Given that Albany International has a market capitalization of US $ 2.84 billion, it’s hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.
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 profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Albany International’s net debt is only 0.29 times its EBITDA. And its EBIT covers its interest costs 11.5 times more. So we’re pretty relaxed about its ultra-conservative use of debt. In contrast, Albany International has seen its EBIT decline by 3.0% over the past twelve months. This kind of decline, if it continues, will obviously make debt more difficult to manage. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Albany International can strengthen its balance sheet over time. 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. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Albany International has recorded free cash flow of 73% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
Fortunately, Albany International’s impressive interest coverage means it has the upper hand over its debt. But frankly, we think its EBIT growth rate undermines that impression a bit. When zoomed out, Albany International appears to be using the debt quite sensibly; and that gets the nod from us. After all, reasonable leverage can increase returns on equity. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Albany International you should know.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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