Does Ferroglobe (NASDAQ:GSM) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Ferroglobe PLC (NASDAQ:GSM) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Ferroglobe

How Much Debt Does Ferroglobe Carry?

As you can see below, at the end of June 2021, Ferroglobe had US$548.1m of debt, up from US$508.7m a year ago. Click the image for more detail. However, it does have US$100.9m in cash offsetting this, leading to net debt of about US$447.2m.

How Healthy Is Ferroglobe's Balance Sheet?

According to the last reported balance sheet, Ferroglobe had liabilities of US$499.6m due within 12 months, and liabilities of US$627.5m due beyond 12 months. Offsetting these obligations, it had cash of US$100.9m as well as receivables valued at US$295.9m due within 12 months. So its liabilities total US$730.2m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Ferroglobe is worth US$1.38b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ferroglobe'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, Ferroglobe reported revenue of US$1.4b, which is a gain of 3.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Ferroglobe produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$94m. 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$246m into a profit. So we do think this stock is quite risky. 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. For example Ferroglobe has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.

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.

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