Is AMREP (NYSE:AXR) Using Too Much Debt?

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 can see that AMREP Corporation (NYSE:AXR) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for AMREP

What Is AMREP's Debt?

The image below, which you can click on for greater detail, shows that AMREP had debt of US$2.08m at the end of July 2022, a reduction from US$6.38m over a year. But it also has US$15.9m in cash to offset that, meaning it has US$13.8m net cash.

How Strong Is AMREP's Balance Sheet?

The latest balance sheet data shows that AMREP had liabilities of US$9.40m due within a year, and liabilities of US$2.08m falling due after that. Offsetting this, it had US$15.9m in cash and US$50.0k in receivables that were due within 12 months. So it can boast US$4.48m more liquid assets than total liabilities.

This short term liquidity is a sign that AMREP could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, AMREP boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that AMREP grew its EBIT by 105% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since AMREP will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While AMREP 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. During the last two years, AMREP generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case AMREP has US$13.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$19m, being 88% of its EBIT. So is AMREP's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with AMREP .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.