Does a2 (NZSE:ATM) milk have a healthy balance sheet?

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, The a2 Milk Company Limited (NZSE:ATM) is in debt. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.

Discover our latest analysis for a2 Milk

How many debts does milk a2 carry?

The image below, which you can click on for more details, shows that in June 2022, a2 ​​Milk had NZ$107.0 million in debt, up from none in a year. However, he has NZ$887.3 million in cash to offset this, resulting in a net cash of NZ$780.3 million.

NZSE: ATM Debt to Equity History September 25, 2022

A look at a2 Milk’s responsibilities

We can see from the most recent balance sheet that a2 Milk had liabilities of NZ$440.2m due in one year, and liabilities of NZ$81.7m due beyond. On the other hand, it had NZ$887.3 million in cash and NZ$89.4 million in receivables due within a year. It can therefore boast that it has NZ$454.8 million more in cash than total Passives.

This surplus suggests that a2 Milk has a conservative balance sheet, and could probably eliminate its debt without too much difficulty. Simply put, the fact that a2 Milk has more cash than debt is arguably a good indication that it can safely manage its debt.

In addition, a2 Milk has increased its EBIT by 40% over the last twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine a2 Milk’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a company can only repay its debts with cold hard cash, not with book profits. Although a2 Milk has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it’s building (or erodes) that treasury. balance. Over the past three years, a2 Milk has generated free cash flow of a very strong 82% of its EBIT, more than expected. This positions him well to pay off debt if desired.


While we sympathize with investors who find debt a concern, you should bear in mind that a2 Milk has a net cash position of NZ$780.3 million, as well as more liquid assets than passive. And it impressed us with a free cash flow of NZ$199 million, or 82% of its EBIT. We therefore do not believe that a2 Milk’s use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 1 warning sign for a2 Milk of which you should be aware.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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