FreightCar America (NASDAQ:RAIL) Has A Somewhat Strained Balance Sheet

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. We can see that FreightCar America, Inc. (NASDAQ:RAIL) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for FreightCar America

What Is FreightCar America's Debt?

You can click the graphic below for the historical numbers, but it shows that FreightCar America had US$29.4m of debt in December 2023, down from US$92.2m, one year before. But it also has US$39.6m in cash to offset that, meaning it has US$10.2m net cash.

How Strong Is FreightCar America's Balance Sheet?

The latest balance sheet data shows that FreightCar America had liabilities of US$137.4m due within a year, and liabilities of US$84.8m falling due after that. On the other hand, it had cash of US$39.6m and US$9.85m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$172.8m.

This deficit casts a shadow over the US$69.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, FreightCar America would likely require a major re-capitalisation if it had to pay its creditors today. FreightCar America boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Notably, FreightCar America made a loss at the EBIT level, last year, but improved that to positive EBIT of US$14m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if FreightCar America can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While FreightCar America 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. During the last year, FreightCar America burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While FreightCar America does have more liabilities than liquid assets, it also has net cash of US$10.2m. Unfortunately, though, both its struggle level of total liabilities and its conversion of EBIT to free cash flow leave us concerned about FreightCar America So despite the cash, we do think it carries some risks. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for FreightCar America 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.