Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Acron Public Stock Company (MCX:AKRN) uses debt. But the more important question is: what risk does this debt create?
When is debt dangerous?
Debt helps a business until the business struggles to pay it back, either with new capital or with free 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 painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for Acron
What is Acron’s debt?
You can click on the chart below for historical numbers, but it shows Acron had €90.3 billion in debt in September 2021, up from €134.9 billion a year prior. However, he has €16.3 billion in cash to offset this, resulting in a net debt of around €74.0 billion.
How strong is Acron’s balance sheet?
According to the last published balance sheet, Acron had liabilities of 29.6 billion euros due within 12 months and liabilities of 97.4 billion euros due beyond 12 months. On the other hand, it had a cash position of ₽16.3 billion and ₽13.9 billion in receivables due within one year. Thus, its liabilities total 96.8 billion euros more than the combination of its cash and short-term receivables.
Given that Acron has a market cap of €510.7 billion, it’s hard to believe that these liabilities pose a threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.
We measure a company’s leverage against its earning power 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 charge (interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
Acron has a low net debt to EBITDA ratio of just 0.93. And its EBIT covers its interest charges 22.6 times. So we’re pretty relaxed about his super-conservative use of debt. What’s even more impressive is that Acron increased its EBIT by 282% year-over-year. If sustained, this growth will make debt even more manageable in years to come. The balance sheet is clearly the area to focus on when analyzing debt. But future earnings, more than anything, will determine Acron’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Acron has recorded free cash flow of 43% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.
Our point of view
Fortunately, Acron’s impressive interest coverage means it has the upper hand on its debt. And this is only the beginning of good news since its EBIT growth rate is also very encouraging. When we consider the range of factors above, it seems that Acron is quite sensible with its use of debt. This means they take on a bit more risk, hoping to increase shareholder returns. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, Acron has 3 warning signs (and 1 which is potentially serious) that we think you should know about.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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