The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Eagle Bulk Shipping Inc. (NASDAQ:EGLE) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Eagle Bulk Shipping's Debt?
The chart below, which you can click on for greater detail, shows that Eagle Bulk Shipping had US$453.3m in debt in December 2020; about the same as the year before. However, it does have US$69.9m in cash offsetting this, leading to net debt of about US$383.4m.
A Look At Eagle Bulk Shipping's Liabilities
According to the last reported balance sheet, Eagle Bulk Shipping had liabilities of US$82.4m due within 12 months, and liabilities of US$414.3m due beyond 12 months. On the other hand, it had cash of US$69.9m and US$13.8m worth of receivables due within a year. So its liabilities total US$412.9m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of US$450.3m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Eagle Bulk Shipping can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Eagle Bulk Shipping had a loss before interest and tax, and actually shrunk its revenue by 5.9%, to US$275m. We would much prefer see growth.
Importantly, Eagle Bulk Shipping had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$2.9m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$20m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For example - Eagle Bulk Shipping has 2 warning signs we think you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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