Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Ardmore Shipping Corporation (NYSE:ASC) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Ardmore Shipping’s Debt?
As you can see below, Ardmore Shipping had US$447.6m of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. However, it also had US$52.3m in cash, and so its net debt is US$395.3m.
How Strong Is Ardmore Shipping’s Balance Sheet?
According to the last reported balance sheet, Ardmore Shipping had liabilities of US$61.9m due within 12 months, and liabilities of US$410.0m due beyond 12 months. Offsetting these obligations, it had cash of US$52.3m as well as receivables valued at US$28.4m due within 12 months. So its liabilities total US$391.3m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the US$241.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Ardmore Shipping would likely require a major re-capitalisation if it had to pay its creditors today. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ardmore Shipping’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 report on analyst profit forecasts to be interesting.
In the last year Ardmore Shipping managed to grow its revenue by 13%, to US$222m. We usually like to see faster growth from unprofitable companies, but each to their own.
Over the last twelve months Ardmore Shipping produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$5.9m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It’s fair to say the loss of-US$46.9m didn’t encourage us either; we’d like to see a profit. In the meantime, we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Ardmore Shipping’s profit, revenue, and operating cashflow have changed over the last few years.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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