The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Ampco-Pittsburgh Corporation (NYSE:AP) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Ampco-Pittsburgh

What Is Ampco-Pittsburgh's Debt?

As you can see below, Ampco-Pittsburgh had US$11.7m of debt at September 2020, down from US$50.4m a year prior. But on the other hand it also has US$18.3m in cash, leading to a US$6.61m net cash position.

How Strong Is Ampco-Pittsburgh's Balance Sheet?

We can see from the most recent balance sheet that Ampco-Pittsburgh had liabilities of US$111.2m falling due within a year, and liabilities of US$270.5m due beyond that. Offsetting this, it had US$18.3m in cash and US$56.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$306.9m.

This deficit casts a shadow over the US$138.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Ampco-Pittsburgh would probably need a major re-capitalization if its creditors were to demand repayment. Ampco-Pittsburgh boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Importantly, Ampco-Pittsburgh grew its EBIT by 67% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ampco-Pittsburgh can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.