Stock Analysis

Art's-Way Manufacturing (NASDAQ:ARTW) Is Carrying A Fair Bit Of Debt

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NasdaqCM:ARTW
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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. Importantly, Art's-Way Manufacturing Co., Inc. (NASDAQ:ARTW) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

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What Is Art's-Way Manufacturing's Debt?

As you can see below, Art's-Way Manufacturing had US$6.86m of debt, at May 2021, which is about the same as the year before. You can click the chart for greater detail. And it doesn't have much cash, so its net debt is about the same.

debt-equity-history-analysis
NasdaqCM:ARTW Debt to Equity History October 6th 2021

A Look At Art's-Way Manufacturing's Liabilities

The latest balance sheet data shows that Art's-Way Manufacturing had liabilities of US$8.18m due within a year, and liabilities of US$2.73m falling due after that. Offsetting these obligations, it had cash of US$5.2k as well as receivables valued at US$2.70m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.20m.

Art's-Way Manufacturing has a market capitalization of US$17.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Art's-Way Manufacturing's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Art's-Way Manufacturing's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Art's-Way Manufacturing produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$2.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$1.5m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Art's-Way Manufacturing (2 can't be ignored!) that you should be aware of before investing here.

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.

What are the risks and opportunities for Art's-Way Manufacturing?

Art's-Way Manufacturing Co., Inc. manufactures and sells agricultural equipment, specialized modular science buildings, and steel cutting tools in the United States and internationally.

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Rewards

  • Became profitable this year

Risks

  • Interest payments are not well covered by earnings

  • Does not have a meaningful market cap ($12M)

  • Shareholders have been diluted in the past year

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