Would Century Aluminum (NASDAQ:CENX) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 the real question is whether this debt is making the company risky.

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Century Aluminum

What Is Century Aluminum's Debt?

As you can see below, at the end of June 2020, Century Aluminum had US$374.5m of debt, up from US$304.8m a year ago. Click the image for more detail. On the flip side, it has US$174.1m in cash leading to net debt of about US$200.4m.

How Healthy Is Century Aluminum's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Century Aluminum had liabilities of US$249.6m due within 12 months and liabilities of US$625.7m due beyond that. Offsetting these obligations, it had cash of US$174.1m as well as receivables valued at US$45.7m due within 12 months. So its liabilities total US$655.5m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$883.2m, so it does suggest shareholders should keep an eye on Century Aluminum's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Century Aluminum'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.

In the last year Century Aluminum had a loss before interest and tax, and actually shrunk its revenue by 12%, to US$1.7b. 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. Indeed, it lost US$57.4m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$55.1m into a profit. So in short it's a really risky stock. 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 Century Aluminum is showing 3 warning signs in our investment analysis , you should know about...

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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