In This Article:
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Ferrexpo plc (LON:FXPO) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Ferrexpo
What Is Ferrexpo's Debt?
As you can see below, Ferrexpo had US$50.3m of debt at December 2021, down from US$257.4m a year prior. However, it does have US$167.3m in cash offsetting this, leading to net cash of US$116.9m.
How Strong Is Ferrexpo's Balance Sheet?
We can see from the most recent balance sheet that Ferrexpo had liabilities of US$228.1m falling due within a year, and liabilities of US$32.2m due beyond that. On the other hand, it had cash of US$167.3m and US$241.0m worth of receivables due within a year. So it can boast US$148.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Ferrexpo could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Ferrexpo boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Ferrexpo grew its EBIT by 63% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ferrexpo's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ferrexpo has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Ferrexpo recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.