These 4 Measures Indicate That Ampco-Pittsburgh (NYSE:AP) Is Using Debt Extensively

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Ampco-Pittsburgh Corporation (NYSE:AP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ampco-Pittsburgh

How Much Debt Does Ampco-Pittsburgh Carry?

The image below, which you can click on for greater detail, shows that Ampco-Pittsburgh had debt of US$11.7m at the end of September 2020, a reduction from US$54.8m over a year. However, it does have US$18.3m in cash offsetting this, leading to net cash of US$6.61m.

How Strong Is Ampco-Pittsburgh's Balance Sheet?

According to the last reported balance sheet, Ampco-Pittsburgh had liabilities of US$111.2m due within 12 months, and liabilities of US$270.5m due beyond 12 months. Offsetting this, it had US$18.3m in cash and US$71.5m in receivables that were due within 12 months. So its liabilities total US$291.9m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$78.9m 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'd watch its balance sheet closely, without a doubt. After all, Ampco-Pittsburgh would likely require a major re-capitalisation if it had to pay its creditors today. Ampco-Pittsburgh boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

We also note that Ampco-Pittsburgh improved its EBIT from a last year's loss to a positive US$6.5m. 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 Ampco-Pittsburgh's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ampco-Pittsburgh may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Ampco-Pittsburgh actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Ampco-Pittsburgh does have more liabilities than liquid assets, it also has net cash of US$6.61m. The cherry on top was that in converted 443% of that EBIT to free cash flow, bringing in US$29m. So while Ampco-Pittsburgh does not have a great balance sheet, it's certainly not too bad. 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. Take risks, for example - Ampco-Pittsburgh has 4 warning signs (and 1 which shouldn't be ignored) we think 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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