Stock Analysis

Here's Why Ardmore Shipping (NYSE:ASC) Can Manage Its Debt Responsibly

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Ardmore Shipping Corporation (NYSE:ASC) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ardmore Shipping

What Is Ardmore Shipping's Net Debt?

As you can see below, Ardmore Shipping had US$128.8m of debt at December 2022, down from US$145.1m a year prior. However, it also had US$50.6m in cash, and so its net debt is US$78.2m.

NYSE:ASC Debt to Equity History March 14th 2023

How Strong Is Ardmore Shipping's Balance Sheet?

The latest balance sheet data shows that Ardmore Shipping had liabilities of US$52.9m due within a year, and liabilities of US$164.5m falling due after that. On the other hand, it had cash of US$50.6m and US$79.8m worth of receivables due within a year. So it has liabilities totalling US$87.0m more than its cash and near-term receivables, combined.

Since publicly traded Ardmore Shipping shares are worth a total of US$669.9m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Ardmore Shipping has a low net debt to EBITDA ratio of only 0.41. And its EBIT easily covers its interest expense, being 10.6 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Although Ardmore Shipping made a loss at the EBIT level, last year, it was also good to see that it generated US$159m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ardmore Shipping'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the most recent year, Ardmore Shipping recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, Ardmore Shipping's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. And the good news does not stop there, as its interest cover also supports that impression! Looking at the bigger picture, we think Ardmore Shipping's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Ardmore Shipping (1 makes us a bit uncomfortable) you should be aware of.

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.

What are the risks and opportunities for Ardmore Shipping?

Ardmore Shipping Corporation engages in the seaborne transportation of petroleum products and chemicals worldwide.

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  • Trading at 5.7% below our estimate of its fair value

  • Became profitable this year


  • Earnings are forecast to decline by an average of 10.9% per year for the next 3 years

  • Shareholders have been diluted in the past year

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