David Iben put it well when he said: âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Advance Gas Holding SA (OB: AGAS) uses debt. But the most important question is: what risk does this debt create?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
See our latest analysis for Avance Gas Holding
What is the debt of Advance Gas Holding?
As you can see below, Avance Gas Holding had debt of US $ 368.1 million in June 2021, up from US $ 471.8 million the year before. However, it has $ 107.9 million in cash offsetting that, leading to net debt of around $ 260.2 million.
How healthy is Advance Gas Holding’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Advance Gas Holding had liabilities of US $ 59.3 million due within 12 months and liabilities of US $ 362.0 million due beyond. In compensation for these obligations, it had cash of US $ 107.9 million as well as receivables valued at US $ 20.6 million due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 292.7 million.
This is a mountain of leverage compared to its market cap of $ 384.0 million. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Avance Gas Holding has a debt / EBITDA ratio of 2.9 and its EBIT has covered its interest expense 2.6 times. This suggests that while debt levels are significant, we would stop calling them problematic. Worse yet, Avance Gas Holding has seen its EBIT reach 55% over the past 12 months. If the income continues like this for the long haul, there is an incredible chance to pay off that debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Advance Gas Holding’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts‘ earnings forecasts.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Avance Gas Holding has recorded free cash flow representing 64% of its EBIT, which is close to normal, given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Reflecting on Advance Gas Holding’s attempt to (not) increase its EBIT, we are certainly not enthusiastic. But at least it’s pretty decent to convert EBIT into free cash flow; it’s encouraging. Overall, we think it’s fair to say that Advance Gas Holding has enough debt that there is real risk around the balance sheet. If all goes well, this should increase returns, but on the other hand, the risk of permanent capital loss is increased by debt. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Note that Advance Gas Holding displays 4 warning signs in our investment analysis , and 2 of them make us uncomfortable …
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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