Some say volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies GATX Company (NYSE: GATX) uses debt. But the real question is whether this debt makes the business risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first consider both liquidity and debt levels.

See our latest review for GATX

How much debt does GATX carry?

You can click on the graph below for historical figures, but it shows that as of June 2021, GATX had a debt of US $ 5.82 billion, an increase from US $ 5.05 billion, over a year. However, it has $ 421.1 million in cash offsetting that, which leads to net debt of around $ 5.40 billion.

A look at the responsibilities of GATX

According to the latest published balance sheet, GATX had liabilities of US $ 245.8 million due within 12 months and liabilities of US $ 7.18 billion due beyond 12 months. In return, he had $ 421.1 million in cash and $ 143.3 million in receivables due within 12 months. It therefore has liabilities totaling US $ 6.86 billion more than its cash and short-term receivables combined.

This deficit casts a shadow over the $ 3.13 billion company like a colossus towering over mere mortals. We therefore believe that shareholders should watch it closely. After all, GATX would likely need a major recapitalization if it were to pay its creditors today.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

GATX shareholders are faced with the double whammy of a high net debt to EBITDA ratio (8.2) and relatively low interest coverage, since EBIT is only 1.5 times the expenses of ‘interests. This means that we would consider him to be in heavy debt. The good news is that GATX has improved its EBIT by 9.9% over the last twelve months, gradually reducing its level of debt compared to its results. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine GATX’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. We must therefore clearly verify whether this EBIT generates a corresponding free cash flow. Over the past three years, GATX has recorded substantial total negative free cash flow. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.

Our point of view

At first glance, converting GATX’s EBIT to free cash flow left us hesitant about the stock, and its total liability level was no more appealing than the single empty restaurant on the busiest night of the year. year. But on the positive side, its EBIT growth rate is a good sign and makes us more optimistic. Considering all of the above factors, it looks like GATX is too much in debt. This kind of risk is acceptable to some, but it certainly does not float our boat. 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 off the balance sheet. To this end, you should inquire about the 4 warning signs we spotted with GATX (including 1 that should not be ignored).

If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.

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

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