We Think Ferrexpo (LON:FXPO) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Ferrexpo plc (LON:FXPO) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ferrexpo

What Is Ferrexpo's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ferrexpo had US$257.4m of debt in December 2020, down from US$402.3m, one year before. But on the other hand it also has US$270.0m in cash, leading to a US$12.6m net cash position.

How Healthy Is Ferrexpo's Balance Sheet?

The latest balance sheet data shows that Ferrexpo had liabilities of US$295.9m due within a year, and liabilities of US$167.6m falling due after that. On the other hand, it had cash of US$270.0m and US$185.4m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Ferrexpo's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$3.59b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Ferrexpo boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Ferrexpo has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ferrexpo'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ferrexpo has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Ferrexpo recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Ferrexpo's liabilities, but we can be reassured by the fact it has has net cash of US$12.6m. And we liked the look of last year's 27% year-on-year EBIT growth. So we don't think Ferrexpo's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Ferrexpo has 3 warning signs (and 1 which is concerning) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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