Is Albany International (NYSE:AIN) using too much debt?
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a 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. We can see that Albany International Corp. (NYSE: AIN) uses debt in its operations. But does this debt worry shareholders?
What risk does debt carry?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for Albany International
What is Albany International’s net debt?
The image below, which you can click on for more details, shows that as of June 2022, Albany International had $485.0 million in debt, up from $359.3 million in one year. However, since he has a cash reserve of $320.9 million, his net debt is less, at around $164.1 million.
How healthy is Albany International’s balance sheet?
According to the last published balance sheet, Albany International had liabilities of $188.2 million due within 12 months and liabilities of $603.1 million due beyond 12 months. On the other hand, it had a cash position of 320.9 million dollars and 335.4 million dollars of receivables at less than one year. It therefore has liabilities totaling $135.0 million more than its cash and short-term receivables, combined.
Given that Albany International has a market cap of US$2.85 billion, it’s hard to believe that these liabilities pose much of a threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.
We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
Albany International’s net debt is only 0.66 times its EBITDA. And its EBIT easily covers its interest charges, which is 12.1 times the size. So we’re pretty relaxed about his super conservative use of debt. Fortunately, Albany International has grown its EBIT by 6.2% over the past year, making this debt even more manageable. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Albany International can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the taxman may love accounting profits, lenders only accept cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Albany International has recorded free cash flow of 65% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.
Our point of view
Fortunately, Albany International’s impressive interest coverage means it has the upper hand on its debt. And the good news doesn’t stop there, since its net debt to EBITDA also confirms this impression! Overall, we think Albany International’s use of debt seems entirely reasonable and we are not concerned about that. After all, reasonable leverage can increase return on equity. Above most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you’ve also achieved this achievement, you’re in luck, because today you can view this interactive chart of Albany International’s historical earnings per share for free.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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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.