Is Ampco-Pittsburgh (NYSE:AP) A Risky Investment?

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 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. We note that Ampco-Pittsburgh Corporation (NYSE:AP) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ampco-Pittsburgh

How Much Debt Does Ampco-Pittsburgh Carry?

As you can see below, Ampco-Pittsburgh had US$11.7m of debt at September 2020, down from US$50.4m a year prior. But it also has US$18.3m in cash to offset that, meaning it has US$6.61m net cash.

How Healthy Is Ampco-Pittsburgh's Balance Sheet?

The latest balance sheet data shows that Ampco-Pittsburgh had liabilities of US$111.2m due within a year, and liabilities of US$270.5m falling due after that. On the other hand, it had cash of US$18.3m and US$56.5m worth of receivables due within a year. So it has liabilities totalling US$306.9m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$138.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Ampco-Pittsburgh would probably need a major re-capitalization if its creditors were to demand repayment. Given that Ampco-Pittsburgh has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Importantly, Ampco-Pittsburgh grew its EBIT by 67% over the last twelve months, and that growth will make it easier to handle its debt. 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 Ampco-Pittsburgh 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ampco-Pittsburgh has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Ampco-Pittsburgh actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Ampco-Pittsburgh's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$6.61m. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in US$29m. So we are not troubled with Ampco-Pittsburgh's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Ampco-Pittsburgh 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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