Is Century Aluminum (NASDAQ:CENX) A Risky Investment?

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.' 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 note that Century Aluminum Company (NASDAQ:CENX) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

View our latest analysis for Century Aluminum

How Much Debt Does Century Aluminum Carry?

As you can see below, Century Aluminum had US$528.0m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$93.5m in cash offsetting this, leading to net debt of about US$434.5m.

A Look At Century Aluminum's Liabilities

We can see from the most recent balance sheet that Century Aluminum had liabilities of US$468.9m falling due within a year, and liabilities of US$793.9m due beyond that. Offsetting these obligations, it had cash of US$93.5m as well as receivables valued at US$167.0m due within 12 months. So its liabilities total US$1.00b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$1.64b, so it does suggest shareholders should keep an eye on Century Aluminum's use of debt. 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 Century Aluminum can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Century Aluminum had a loss before interest and tax, and actually shrunk its revenue by 18%, to US$2.1b. We would much prefer see growth.

Caveat Emptor

While Century Aluminum'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$200k. 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$19m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Century Aluminum has 3 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.