An external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no secret of this when he says, “The biggest investment risk is not price volatility, but whether you will continually lose capital.” The smart money seems to know that debt, which is usually associated with bankruptcy, is a very important factor when evaluating how risky a company is. Note that Acuity Brands, Inc. (NYSE: AYI) does have debt on its balance sheet. But the real question is whether this debt makes the company risky.
What is the risk of debt?
Generally speaking, debt becomes a real problem only when the company cannot easily repay it either by raising capital or by using its own cash flow. If things go badly, lenders can take control of the business. However, the more common (but still costly) case is that a company is forced to issue shares at undervalued prices, constantly diluting shareholders, simply to strengthen its balance sheet. Of course, debt can be an important tool in business, especially in a capital-heavy business. The first step in considering a company’s debt level is to consider its cash and debt together.
Check out our latest analysis of Acuity brands
What is Acuity Brands debt?
As you can see below, at the end of February 2021, Acuity Brands had $ 498.0 million in debt, up from $ 406.2 million a year ago. Click the image for more details. But on the other hand, he also has cash in the amount of USD 498.7 million, which gives a net cash position of USD 700.0 thousand.
A look at the commitments of the Acuity brands
The latest balance sheet shows that Acuity Brands has liabilities of $ 576.3 million due within one year and liabilities of $ 851.4 million due thereafter. On the other hand, he had cash in the amount of US $ 498.7 million and accounts receivable in the amount of US $ 448.0 million due during the year. Thus, its liabilities amount to USD 481.0 million more than the sum of cash and short-term receivables.
Of course, Acuity Brands has a market cap of $ 6.56 billion, so these commitments can probably be dealt with. But there are sufficient commitments and we would certainly recommend that shareholders continue to monitor the balance sheet in the future. Despite its noteworthy commitments, Acuity Brands boasts net cash, so it’s fair to say it doesn’t have a lot of leverage!
On the other hand, Acuity Brands’ EBIT has dropped 11% over the past year. We think that this kind of performance, if repeated often, can lead to difficulties for stocks. When analyzing the level of debt, obviously, you should start with the balance sheet. But it is future earnings that, more than anything else, will determine Acuity Brands’ ability to maintain a healthy balance in the future. So if you are focused on the future you can check this out. is free a report showing analysts’ profit forecasts.
But our last consideration is also important, because the company cannot pay off the debt in paper profits; he needs cold cash. While Acuity Brands has net cash on its balance sheet, it’s worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow to help us understand how quickly it accumulates (or shrinks) that cash balance. … Over the past three years, Acuity Brands has generated 97% of EBIT free cash flow, which is more than we expected. This gives him a very good opportunity to pay off the debt.
We could understand if investors are worried about Acuity Brands’ commitments, but we can be reassured by the fact that the company has net cash of USD 700,000. And he impressed us with $ 452 million in free cash flow, which is 97% of his EBIT. So we are not worried about the use of Acuity Brands debt. When analyzing the level of debt, obviously, you should start with the balance sheet. However, not all investment risk is in the balance sheet – far from it. These risks can be difficult to detect. Every company has them, and we noticed 2 warning signs for Acuity brands you should know about.
If, after all this, you are more interested in a fast-growing company with a solid balance sheet, then check out our list of net cash gains without delay.
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