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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a 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. Mostly, AptarGroup, Inc. (NYSE: ATR) is in debt. But the real question is whether this debt makes the business risky.
When Is Debt a Problem?
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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. 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 think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for AptarGroup
What is AptarGroup’s net debt?
The image below, which you can click for more details, shows that AptarGroup was in debt of $ 1.08 billion at the end of March 2021, a reduction from $ 1.33 billion. US over one year. However, it has US $ 254.9 million in cash offsetting this, which leads to net debt of around US $ 820.6 million.
Is AptarGroup’s balance sheet healthy?
We can see from the most recent balance sheet that AptarGroup had liabilities of US $ 755.9 million due within one year and liabilities of US $ 1.34 billion due beyond. . In compensation for these obligations, it had cash of US $ 254.9 million as well as receivables valued at US $ 636.6 million due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 1.20 billion.
Given that AptarGroup’s publicly traded shares are worth a total of $ 9.10 billion, it seems unlikely that this level of liabilities is a major threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
AptarGroup has a low net debt to EBITDA ratio of just 1.4. And its EBIT covers its interest costs 26.5 times more. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. AptarGroup’s EBIT was fairly stable over the past year, but that shouldn’t be a problem given that it doesn’t have a lot of 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 AptarGroup’s ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, AptarGroup has generated strong free cash flow equivalent to 60% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Fortunately, AptarGroup’s impressive interest coverage means it has the upper hand on its debt. And we also thought his conversion from EBIT to free cash flow was positive. Looking at all of the aforementioned factors together, it seems to us that AptarGroup can manage its debt quite comfortably. Of course, while this leverage can improve returns on equity, it brings more risk, so it’s worth keeping an eye out for. 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. We have identified 3 warning signs with AptarGroup, and understanding them should be part of your investment process.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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