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. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that of Amico International Shipping SA (BIT:DIS) uses debt in its business. But the real question is whether this debt makes the business risky.

When is debt dangerous?

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. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.

Check out our latest analysis for d’Amico International Shipping

What is Amico International Shipping’s debt?

The image below, which you can click on for more details, shows that Amico International Shipping had debt of $289.3 million at the end of March 2022, a reduction from $329.9 million on a year. However, he also had $45.4 million in cash, so his net debt is $243.9 million.

How healthy is d’Amico International Shipping’s balance sheet?

According to the last published balance sheet, d’Amico International Shipping had liabilities of US$151.1 million due within 12 months and liabilities of US$436.2 million due beyond 12 months. In compensation for these obligations, it had cash of US$45.4 million as well as receivables valued at US$38.3 million and maturing within 12 months. Thus, its liabilities outweigh the sum of its cash and receivables (current) by $503.6 million.

The deficiency here weighs heavily on the $247.7 million business itself, like a child struggling under the weight of a huge backpack full of books, his gym gear and a trumpet. . We would therefore be watching his balance sheet closely, no doubt. Ultimately, d’Amico International Shipping would likely need a major recapitalization if its creditors were to demand repayment.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). 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 ).

Amico International Shipping shareholders face the double whammy of a high net debt to EBITDA ratio (7.2) and quite low interest coverage, as EBIT is only 0.23 times the interest charge. This means that we would consider him to be heavily indebted. Worse still, d’Amico International Shipping’s EBIT is down 85% from a year ago. If profits continue like this in the long term, there is an unimaginable chance of repaying this debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine d’Amico International Shipping’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

But our last consideration is also important, because a company cannot pay off its debts with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Fortunately for all shareholders, d’Amico International Shipping has actually produced more free cash flow than EBIT for the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our point of view

To be frank, d’Amico International Shipping’s EBIT growth rate and track record of keeping total liabilities under control makes us rather uncomfortable with its level of leverage. But on the bright side, its conversion from EBIT to free cash flow is a good sign and makes us more optimistic. After reviewing the data points discussed, we believe that d’Amico International Shipping has too much debt. That kind of risk is acceptable to some, but it certainly doesn’t 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 outside of the balance sheet. For example, we have identified 1 warning sign for Amico International Shipping of which you should be aware.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

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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.