Is Navios Maritime Acquisition (NYSE: NNA) Using Too Much Debt?
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it might be obvious, then, 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 Navios Maritime Acquisition Corporation (NYSE: NNA) has debt on its balance sheet. But the most important question is: what is the risk that this debt creates?
When is debt a problem?
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. That said, the most common situation is where a business manages its debt reasonably well – and to its advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
What is the debt of Navios Maritime Acquisition?
As you can see below, Navios Maritime Acquisition had $ 721.9 million in debt as of December 2020, up from $ 861.9 million a year earlier. However, it has US $ 41.4 million in cash, which translates into net debt of approximately US $ 680.5 million.
NYSE: History of NNA Debt to Equity April 28, 2021
How strong is the balance sheet of the Navios Maritime acquisition?
The latest balance sheet data shows that Navios Maritime Acquisition had a liability of US $ 162.6 million due in one year, and a liability of US $ 1.08 billion due thereafter. In return, he had US $ 41.4 million in cash and US $ 19.8 million in receivables due within 12 months. Its liabilities are therefore $ 1.18 billion more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the $ 57.1 million company, like a colossus towering over mere mortals. We would therefore monitor its record closely, without a doubt. After all, the acquisition of Navios Maritime would likely require a major recapitalization if it were to pay its creditors today.
We use two main ratios to tell us about leverage versus earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
While Navios Maritime Acquisition’s debt / EBITDA ratio (3.8) suggests that it is using some debt, its interest coverage is very low at 1.4, which suggests high leverage. Shareholders should therefore probably be aware that interest charges seem to have really had an impact on the company lately. However, it should be reassuring for shareholders to remember that Navios Maritime Acquisition has in fact increased its EBIT by 126% over the past 12 months. If he can continue on this path, he will be able to pay off his debt with relative ease. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the future profitability of the business will decide whether Navios Maritime Acquisition 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 two years, Navios Maritime Acquisition has burned a lot of money. While this may be the result of spending for growth, it makes debt much riskier.
Our point of view
To be frank, Navios Maritime Acquisition’s conversion of EBIT to free cash flow and its track record of controlling its total liabilities makes us rather uncomfortable with its debt levels. But at least it’s decent enough to grow your EBIT; it’s encouraging. Overall, it seems to us that Navios Maritime Acquisition’s track record is a real risk to the business. For this reason, we are fairly cautious on the stock and believe that shareholders should closely monitor its liquidity. 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. Concrete example: we have spotted 4 warning signs for the acquisition of Navios Maritime you should be aware of that, and one of them doesn’t suit us very well.
Of course, if you are the type of investor who prefers to buy stocks without the burden of debt, feel free to check out our exclusive list of cash net growth stocks today.
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