Is Eagle Bulk Shipping (NASDAQ:EGLE) 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. Importantly, Eagle Bulk Shipping Inc. (NASDAQ:EGLE) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Eagle Bulk Shipping

How Much Debt Does Eagle Bulk Shipping Carry?

As you can see below, Eagle Bulk Shipping had US$453.8m of debt at September 2021, down from US$498.4m a year prior. On the flip side, it has US$100.0m in cash leading to net debt of about US$353.8m.

How Strong Is Eagle Bulk Shipping's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eagle Bulk Shipping had liabilities of US$165.9m due within 12 months and liabilities of US$389.1m due beyond that. On the other hand, it had cash of US$100.0m and US$24.2m worth of receivables due within a year. So its liabilities total US$430.8m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$549.5m, so it does suggest shareholders should keep an eye on Eagle Bulk Shipping's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Eagle Bulk Shipping has net debt worth 1.6 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 5.2 times the interest expense. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. We also note that Eagle Bulk Shipping improved its EBIT from a last year's loss to a positive US$176m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Eagle Bulk Shipping 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. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. In the last year, Eagle Bulk Shipping created free cash flow amounting to 7.3% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

On the face of it, Eagle Bulk Shipping's level of total liabilities left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability handle its debt, based on its EBITDA, isn't such a worry. Once we consider all the factors above, together, it seems to us that Eagle Bulk Shipping's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Eagle Bulk Shipping that you should be aware of.

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.