Does Kaiser Aluminum (NASDAQ: KALU) have a healthy track record?
David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Kaiser Aluminum Company (NASDAQ: KALU) uses debt in its business. But does this debt concern shareholders?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. 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) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for Kaiser Aluminum
What is Kaiser Aluminum’s debt?
As you can see below, at the end of June 2021, Kaiser Aluminum was in debt of $ 1.04 billion, up from $ 837.1 million a year ago. Click on the image for more details. However, it has US $ 283.1 million in cash offsetting this, which leads to net debt of around US $ 752.4 million.
A look at the responsibilities of Kaiser Aluminum
According to the latest published balance sheet, Kaiser Aluminum had a liability of US $ 439.5 million due within 12 months and a liability of US $ 1.25 billion due beyond 12 months. In return, he had $ 283.1 million in cash and $ 474.7 million in receivables due within 12 months. It therefore has a liability totaling US $ 936.0 million more than its cash and short-term receivables combined.
This deficit is not that big of a deal as Kaiser Aluminum is worth $ 1.77 billion, so it could probably raise enough capital to consolidate its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.
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). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
The shareholders of Kaiser Aluminum are faced with the double whammy of a high net debt / EBITDA ratio (5.4) and relatively low interest coverage, since EBIT only represents 1.5 times the expenses of interests. The debt burden here is considerable. Worse yet, Kaiser Aluminum has seen its EBIT reach 44% over the past 12 months. If profits continue to follow this path, it will be more difficult to pay off this debt than to convince us to run a marathon in the rain. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Kaiser Aluminum can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Kaiser Aluminum has recorded free cash flow of 98% of its EBIT, which is higher than what we usually expected. This puts him in a very strong position to pay off the debt.
Our point of view
At first glance, Kaiser Aluminum’s interest hedging left us hesitant about the stock, and its EBIT growth rate was no more attractive than the single empty restaurant on the busiest night of the year. But at least it’s pretty decent to convert EBIT into free cash flow; it’s encouraging. Once we consider all of the above factors together it seems to us that Kaiser Aluminum’s debt makes it a bit risky. Some people like this kind of risk, but we are aware of the potential pitfalls, so we would probably prefer him to carry less debt. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Kaiser Aluminum has 3 warning signs (and 1 which is of concern) we think you should be aware of.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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