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 Air Industries Group (NYSEMKT:AIRI) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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 think about a company's use of debt, we first look at cash and debt together.
What Is Air Industries Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Air Industries Group had US$29.4m of debt, an increase on US$23.1m, over one year. However, because it has a cash reserve of US$1.46m, its net debt is less, at about US$27.9m.
How Healthy Is Air Industries Group's Balance Sheet?
According to the last reported balance sheet, Air Industries Group had liabilities of US$35.4m due within 12 months, and liabilities of US$12.0m due beyond 12 months. Offsetting these obligations, it had cash of US$1.46m as well as receivables valued at US$9.75m due within 12 months. So its liabilities total US$36.2m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of US$43.8m, so it does suggest shareholders should keep an eye on Air Industries Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Air Industries Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Air Industries Group made a loss at the EBIT level, and saw its revenue drop to US$49m, which is a fall of 6.2%. That's not what we would hope to see.
Over the last twelve months Air Industries Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$2.6m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$6.2m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Be aware that Air Industries Group is showing 4 warning signs in our investment analysis , and 1 of those is a bit concerning...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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