Alico’s use of debt (NASDAQ: ALCO) could be seen as risky
David Iben put it right when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. So it seems like smart money knows that debt – which is usually linked to bankruptcies – is a very important factor when you assess the risk of a business. Like many other companies Alico, Inc. (NASDAQ: ALCO) uses debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt 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. 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 costly) situation is where a company has to dilute its shareholders at a cheap stock price just to get its debt under control. Of course, many companies use debt to finance growth without any negative consequences. When we look at debt levels, we first look at cash and debt levels, together.
Check out our latest analysis for Alico
What is Alico’s net debt?
As you can see below, Alico had a debt of US $ 141.3 million in March 2021, up from US $ 219.1 million the year before. However, it has US $ 10.4 million in cash, which translates into net debt of approximately US $ 130.9 million.
How healthy is Alico’s track record?
The latest balance sheet data shows that Alico had liabilities of US $ 27.0 million due within one year and liabilities of US $ 173.4 million due thereafter. In return for these obligations, it had cash of US $ 10.4 million as well as receivables valued at US $ 11.0 million due within 12 months. As a result, it has liabilities totaling $ 179.0 million more than its cash and short-term receivables combined.
This is a mountain of leverage compared to its market cap of US $ 232.6 million. This suggests that shareholders would be greatly diluted if the company needed to consolidate its balance sheet quickly.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) cover his interests. costs (interest coverage). Thus, we look at debt versus earnings with and without amortization charges.
While we are not worried about Alico’s 4.9-fold net debt to EBITDA ratio, we do believe that its extremely low 2.2x interest coverage is a sign of high leverage. Much of this is due to the company’s large depreciation charges, which arguably means that its EBITDA is a very generous measure of earnings, and its debt may be heavier than it first appears. Shareholders should therefore probably be aware that interest charges seem to have really had an impact on the company lately. Worse yet, Alico has seen its EBIT 74% over the past 12 months. If the profits continue like this for the long term, it has an incredible chance to pay off that debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Alico can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business can only pay off its debts with cash, not book profits. We must therefore clearly examine whether this EBIT leads to a corresponding free cash flow. Over the past three years, Alico has recorded free cash flow of 21% of its EBIT, which is lower than expected. It’s not great when it comes to paying down debt.
Our point of view
To be frank, both Alico’s interest coverage and his track record of (non) growing EBIT make us rather uncomfortable with his debt levels. And even his conversion from EBIT to free cash flow doesn’t inspire much confidence. Overall, it seems to us that Alico’s balance sheet is really a risk for the company. For this reason, we are fairly cautious on the stock and believe that shareholders should closely monitor its liquidity. The balance sheet is clearly the area 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, we discovered 4 warning signs for Alico (1 is a little worrying!) Which you should be aware of before investing here.
If you want to invest in companies that can generate profits without the burden of debt, take a look at this free list of growing companies that have net cash on the balance sheet.
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