Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Atkore Inc. (NYSE: ATKR) uses debt in its business. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
What is Atkore’s net debt?
The image below, which you can click for more details, shows Atkore owed US $ 784.5 million at the end of June 2021, a reduction from US $ 846.1 million. over a year. However, he also had $ 397.1 million in cash, so his net debt is $ 387.3 million.
NYSE: ATKR Debt to Equity History November 3, 2021
How strong is Atkore’s balance sheet?
The latest balance sheet data shows Atkore had debts of $ 397.9 million due within one year, and debts of $ 902.4 million due thereafter. In compensation for these obligations, it had cash of US $ 397.1 million as well as receivables valued at US $ 524.9 million due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 378.3 million.
Of course, Atkore has a market cap of US $ 4.60 billion, so this liability is likely manageable. Having said that, it is clear that we must continue to monitor his record lest it get worse.
We measure a company’s debt load relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). 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).
Atkore’s net debt is only 0.56 times its EBITDA. And its EBIT covers its interest expense 18.1 times more. So we’re pretty relaxed about its ultra-conservative use of debt. Best of all, Atkore increased its EBIT by 174% last year, which is an impressive improvement. This boost will make it even easier to pay down debt in the future. There is no doubt that we learn the most about debt from the balance sheet. But it’s future profits, more than anything, that will determine Atkore’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.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years Atkore has generated strong free cash flow equivalent to 65% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Atkore’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. And that’s just the start of good news as its EBIT growth rate is also very encouraging. Considering this range of factors, it seems to us that Atkore is fairly cautious with its debt, and the risks appear to be well under control. The balance sheet therefore seems rather healthy to us. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 4 warning signs for Atkore (1 is potentially serious!) Which you should be aware of before investing here.
At the end of the day, it’s often best to focus on businesses that don’t have 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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