Warren Buffett famously said, '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 note that AMREP Corporation (NYSE:AXR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.
What Is AMREP's Net Debt?
As you can see below, at the end of October 2020, AMREP had US$5.69m of debt, up from US$574.0k a year ago. Click the image for more detail. But on the other hand it also has US$15.7m in cash, leading to a US$10.0m net cash position.
A Look At AMREP's Liabilities
We can see from the most recent balance sheet that AMREP had liabilities of US$4.70m falling due within a year, and liabilities of US$9.00m due beyond that. Offsetting this, it had US$15.7m in cash and US$338.0k in receivables that were due within 12 months. So it can boast US$2.33m more liquid assets than total liabilities.
This surplus suggests that AMREP has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that AMREP has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AMREP'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, AMREP reported revenue of US$24m, which is a gain of 60%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is AMREP?
Although AMREP had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$1.8m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 60% is a good sign. We'd see further strong growth as an optimistic indication. 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 be aware of the 2 warning signs we've spotted with AMREP .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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