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Howard Marks put 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 every investor practice that I know is worried “. 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. We can see that Smith-Midland Corporation (NASDAQ: SMID) uses debt in its business. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. 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. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first look at cash and debt levels together.
What is Smith-Midland’s debt?
The image below, which you can click for more details, shows Smith-Midland owed $ 7.21 million in debt at the end of June 2021, a reduction from $ 8.02 million. US over one year. However, it has $ 14.4 million in cash offsetting that, which leads to a net cash of $ 7.23 million.
NasdaqCM: SMID History of debt to equity October 14, 2021
How healthy is Smith-Midland’s balance sheet?
We can see from the most recent balance sheet that Smith-Midland had liabilities of US $ 14.0 million due within one year and liabilities of US $ 11.2 million due within one year. of the. In compensation for these obligations, he had cash of US $ 14.4 million as well as receivables valued at US $ 12.5 million due within 12 months. He can therefore take advantage of $ 1.66 million in liquid assets more than total Liabilities.
Considering the size of Smith-Midland, it appears its liquid assets are well balanced with its total liabilities. So the $ 87.8 million company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. In short, Smith-Midland has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt!
Best of all, Smith-Midland increased its EBIT by 268% last year, which is an impressive improvement. This boost will make it even easier to pay down debt in the future. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Smith-Midland will need income to repay this debt. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. While Smith-Midland has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building. (or erode) that cash balance. Over the past three years, Smith-Midland has generated free cash flow of 88% of its very robust EBIT, more than we expected. This positions it well to repay debt if it is desirable.
In summary
While it’s always a good idea to investigate a company’s debt, in this case Smith-Midland has US $ 7.23 million in net cash and a decent balance sheet. And he impressed us with free cash flow of US $ 9.4 million, or 88% of his EBIT. So is Smith-Midland debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. To do this, you need to know the 2 warning signs we spotted with Smith-Midland.
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.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 material. Simply Wall St has no position in the mentioned stocks.
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