Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Ferroglobe PLC (NASDAQ: GSM) uses debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest review for Ferroglobe
How many debts does Ferroglobe carry?
As you can see below, at the end of June 2021, Ferroglobe had $ 548.1 million in debt, up from $ 508.7 million a year ago. Click on the image for more details. However, it has $ 100.9 million in cash offsetting that, which leads to net debt of around $ 447.2 million.
Is Ferroglobe’s balance sheet healthy?
According to the latest published balance sheet, Ferroglobe had debt of US $ 499.6 million due within 12 months and debt of US $ 627.5 million due beyond 12 months. In compensation for these obligations, it had cash of US $ 100.9 million as well as receivables valued at US $ 295.9 million at 12 months. Its liabilities therefore total US $ 730.2 million more than the combination of its cash and short-term receivables.
This deficit is not that big as Ferroglobe is worth $ 1.38 billion, and so could probably raise enough capital to consolidate its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution. When analyzing debt levels, the balance sheet is the obvious starting point. But it is Ferroglobe’s results that will influence the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
Year over year, Ferroglobe reported revenue of US $ 1.4 billion, a gain of 3.3%, although it reported no profit before interest and taxes. This rate of growth is a bit slow for our taste, but it takes all types to make a world.
During the last twelve months, Ferroglobe recorded a loss of profit before interest and taxes (EBIT). To be precise, the EBIT loss amounted to US $ 94 million. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. Quite frankly, we believe the record is far from up to par, although it could improve over time. We’d be better off if he turned his 12-month loss of US $ 246 million into a profit. So we think this title is quite risky. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, Ferroglobe has 3 warning signs (and 1 which makes us a little uncomfortable) we think you should be aware of.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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