Stock Analysis

Is Aramark (NYSE:ARMK) A Risky Investment?

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NYSE:ARMK
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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. Importantly, Aramark (NYSE:ARMK) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Aramark

How Much Debt Does Aramark Carry?

The image below, which you can click on for greater detail, shows that at October 2020 Aramark had debt of US$9.25b, up from US$6.58b in one year. However, it does have US$2.51b in cash offsetting this, leading to net debt of about US$6.74b.

debt-equity-history-analysis
NYSE:ARMK Debt to Equity History January 22nd 2021

How Strong Is Aramark's Balance Sheet?

The latest balance sheet data shows that Aramark had liabilities of US$2.35b due within a year, and liabilities of US$10.6b falling due after that. Offsetting this, it had US$2.51b in cash and US$1.43b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$9.03b.

This is a mountain of leverage relative to its market capitalization of US$9.19b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Aramark can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Aramark had a loss before interest and tax, and actually shrunk its revenue by 21%, to US$13b. To be frank that doesn't bode well.

Caveat Emptor

While Aramark's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$83m. 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. Another cause for caution is that is bled US$242m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Aramark that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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What are the risks and opportunities for Aramark?

Aramark provides food, facilities, and uniform services to education, healthcare, business and industry, sports, leisure, and corrections clients in the United States and internationally.

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Rewards

  • Earnings are forecast to grow 24.68% per year

  • Earnings grew by 613.9% over the past year

Risks

  • Interest payments are not well covered by earnings

  • Large one-off items impacting financial results

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