We believe Apogee Enterprises (NASDAQ: APOG) can keep up with its 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 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 Apogee Enterprises, Inc. (NASDAQ: APOG) uses debt. But does this debt worry shareholders?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, 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) situation is where a company has to dilute its shareholders at a cheap stock price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for Apogee Enterprises
What is the debt of Apogee Enterprises?
As you can see below, Apogee Enterprises had $ 165.0 million in debt in February 2021, up from $ 217.9 million the year before. However, he also had US $ 47.3 million in cash, and therefore his net debt is US $ 117.7 million.
How strong is Apogee Enterprises’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Apogee Enterprises had liabilities of $ 217.6 million due within 12 months and liabilities of $ 304.8 million due beyond. In return for these obligations, it had cash of US $ 47.3 million as well as receivables valued at US $ 205.4 million due within 12 months. Therefore, its liabilities total $ 269.7 million more than the combination of its cash and short-term receivables.
Apogee Enterprises has a market capitalization of US $ 992.0 million, so it could most likely raise cash to improve its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay your debt.
In order to size a company’s debt relative to its profit, we calculate its net debt divided by its profit before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and tax (EBIT) divided by its interest expense. (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
Apogee Enterprises has a low net debt to EBITDA ratio of just 0.93. And its EBIT covers its interest costs 16.9 times more. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. The good news is that Apogee Enterprises increased its EBIT by 2.7% year over year, which should allay concerns about debt repayment. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Apogee Enterprises can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a company 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, Apogee Enterprises has recorded free cash flow of 95% of its EBIT, which is higher than what we normally expected. This positions it well to repay debt if it is desirable.
Our point of view
The good news is that Apogee Enterprises’ demonstrated ability to cover interest costs with EBIT delights us like a fluffy puppy does with a toddler. And that’s just the start of the good news as its conversion from EBIT to free cash flow is also very encouraging. When we consider the above range of factors, it looks like Apogee Enterprises is pretty reasonable with its use of debt. While this carries some risk, it can also improve returns for shareholders. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every company has them, and we’ve spotted 3 warning signs for Apogee Enterprises you should know.
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.
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