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. We note that Art’s-Way Manufacturing Co., Inc. (NASDAQ: ARTW) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt a problem?
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. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first consider both liquidity and debt levels.
What is Art’s-Way Manufacturing debt?
As you can see below, Art’s-Way Manufacturing owed US $ 5.17 million in debt, as of November 2020, which is roughly the same as the year before. You can click on the graph for more details. Net debt is about the same because it doesn’t have a lot of cash.
NasdaqCM: ARTW History of debt to equity April 7, 2021
How strong is Art’s-Way Manufacturing’s balance sheet?
The latest balance sheet data shows that Art’s-Way Manufacturing had $ 6.16 million in debt due within one year, and $ 2.73 million in debt due thereafter. On the other hand, he had $ 2.7,000 in cash and $ 2.47 million in receivables within one year. It therefore has a liability totaling US $ 6.42 million more than its cash and short-term receivables combined.
While that might sound like a lot, it’s not that bad since Art’s-Way Manufacturing has a market cap of $ 14.6 million, and could therefore likely strengthen its balance sheet by raising capital if needed. But we absolutely want to keep our eyes open for indications that its debt is too risky. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Art’s-Way Manufacturing that will influence the balance sheet in the future. So if you want to know more about his earnings, it might be worth checking out this graph of his long-term profit trend.
Over the past year, Art’s-Way Manufacturing recorded a loss before interest and taxes and in fact reduced its revenue by 2.1%, to $ 22 million. We would much prefer to see the growth.
Importantly, Art’s-Way Manufacturing recorded a loss of earnings before interest and taxes (EBIT) over the past year. Its EBIT loss was US $ 3.9 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. We therefore believe that its record is a bit strained, but not irreparable. Another reason to be cautious is that it has lost $ 1.5 million in negative free cash flow over the past twelve months. Suffice it to say, then, that we consider the stock to be very risky. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Art’s-Way Manufacturing has 5 warning signs (and 2 that cannot be ignored) we think you should know.
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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