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. As with many other companies Ardmore Shipping Corporation (NYSE:ASC) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. 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.
View our latest analysis for Ardmore Shipping
How Much Debt Does Ardmore Shipping Carry?
As you can see below, Ardmore Shipping had US$46.0m of debt at December 2023, down from US$128.8m a year prior. But it also has US$46.8m in cash to offset that, meaning it has US$779.0k net cash.
A Look At Ardmore Shipping's Liabilities
Zooming in on the latest balance sheet data, we can see that Ardmore Shipping had liabilities of US$33.8m due within 12 months and liabilities of US$82.7m due beyond that. On the other hand, it had cash of US$46.8m and US$56.2m worth of receivables due within a year. So its liabilities total US$13.5m more than the combination of its cash and short-term receivables.
Since publicly traded Ardmore Shipping shares are worth a total of US$653.3m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Ardmore Shipping boasts net cash, so it's fair to say it does not have a heavy debt load!
But the bad news is that Ardmore Shipping has seen its EBIT plunge 20% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ardmore 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ardmore Shipping 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 two years, Ardmore Shipping recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing Up
We could understand if investors are concerned about Ardmore Shipping's liabilities, but we can be reassured by the fact it has has net cash of US$779.0k. And it impressed us with free cash flow of US$134m, being 89% of its EBIT. So we don't have any problem with Ardmore Shipping's use of debt. 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. We've identified 2 warning signs with Ardmore Shipping (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.
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.
Valuation is complex, but we're helping make it simple.
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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.
