Is Armstrong Flooring (NYSE:AFI) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Armstrong Flooring, Inc. (NYSE:AFI) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Armstrong Flooring

What Is Armstrong Flooring's Debt?

As you can see below, Armstrong Flooring had US$69.6m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$22.2m in cash leading to net debt of about US$47.4m.

How Healthy Is Armstrong Flooring's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Armstrong Flooring had liabilities of US$121.3m due within 12 months and liabilities of US$142.4m due beyond that. On the other hand, it had cash of US$22.2m and US$43.8m worth of receivables due within a year. So its liabilities total US$197.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$109.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Armstrong Flooring would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Armstrong Flooring'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.

Over 12 months, Armstrong Flooring made a loss at the EBIT level, and saw its revenue drop to US$582m, which is a fall of 8.8%. We would much prefer see growth.

Caveat Emptor

Importantly, Armstrong Flooring had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$50m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$42m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Armstrong Flooring (including 2 which shouldn't be ignored) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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