Does Atlas (NYSE: ATCO) have a healthy track record?
Howard Marks put it right when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk that concerns me … and every investor I practice. know worries. So it can be obvious that you need to factor in debt, when you think about how risky a given stock is, because too much debt can sink a business. We notice that Atlas Corp. (NYSE: ATCO) has debt on its balance sheet. But the most important question is: what is the risk that this debt creates?
Why is debt risky?
Generally speaking, debt only becomes a real problem when a business cannot easily repay it, 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 has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business is using is to look at its cash flow and debt together.
Discover our latest analyzes for Atlas
What is Atlas’ net debt?
The graph below, which you can click for more details, shows that Atlas had $ 3.73 billion in debt as of March 2021; about the same as the year before. However, it has US $ 337.5 million in cash, which translates into net debt of around US $ 3.39 billion.
A look at Atlas’s responsibilities
According to the latest published balance sheet, Atlas had liabilities of US $ 859.8 million due within 12 months and liabilities of US $ 4.87 billion beyond 12 months. However, it had US $ 337.5 million in cash and US $ 92.6 million in receivables due within one year. Its liabilities therefore exceed the sum of its cash and its (short-term) receivables by 5.30 billion US dollars.
The deficiency here weighs heavily on the US $ 3.38 billion company itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. We would therefore monitor its record closely, without a doubt. After all, Atlas would likely need a major recapitalization if he were to pay his creditors today.
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 consider debt versus earnings with and without amortization charges.
Atlas’ debt represents 3.5 times its EBITDA and its EBIT covers its interest expense 3.2 times more. This suggests that while debt levels are significant, we would stop before calling them problematic. On the other hand, Atlas increased its EBIT by 27% last year. If sustained, this growth should evaporate this debt like scarce drinking water during an unusually hot summer. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Atlas 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.
But our last consideration is also important, because a business cannot pay its debt with profits on paper; he needs cash. We therefore always check the part of this EBIT which translates into free cash flow. Over the past three years, Atlas’ free cash flow has been 26% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.
Our point of view
Reflecting on Atlas’s attempt to keep control of his total liabilities, we’re certainly not that excited. But on the positive side, its EBIT growth rate is a good sign and makes us more optimistic. Overall, we think it’s fair to say that Atlas has enough debt that there is real risk around the balance sheet. If all goes well, this should boost returns, but on the other hand, the risk of permanent capital loss is increased by debt. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 2 warning signs for Atlas you should be aware of that, and one of them doesn’t suit us very well.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
If you are looking to trade Atlas, open an account with the cheapest * professional approved platform, Interactive Brokers. Their clients from more than 200 countries and territories trade stocks, options, futures, currencies, bonds and funds around the world from a single integrated account.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim 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 information. Simply Wall St has no position in any of the stocks mentioned.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Annual Online Review 2020
Do you have any comments on this article? Concerned about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.