Does Argent Industrial (JSE:ART) Have A Healthy Balance Sheet?

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Does Argent Industrial (JSE:ART) Have A Healthy Balance Sheet?

The external fund manager, backed by Charlie Munger of Berkshire Hathaway, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ So it might be obvious that you should consider debt when you think about how risky any given stock is, because too much debt can sink a company. We can see it Argent Industrial Limited (JSE:ART) does use debt in its business. But is this debt a concern for shareholders?

What risk is debt?

Debt helps a business until the business struggles to pay it off, either with new capital or with free cash flow. Ultimately, if the company can’t meet its legal obligations to repay debt, shareholders can walk away with nothing. Although not too common, we often see companies with debt permanently diluting shareholders as lenders force them to raise capital at a difficult price. However, by replacing dilution, debt can be an extremely good tool for companies that need capital to invest in growth at high rates of return. When examining debt levels, we first consider both cash and debt levels together.

See our latest analysis for Argent Industrial

How much debt does Argent Industrial carry?

You can click on the chart below for the historical figures, but it shows that Argent Industrial had R132.9m of debt as of March 2022, an increase of R100.6m, over one year. But on the other hand, it also has R184.4 million in cash, resulting in a net cash position of R51.5 million.

JSE:ART Debt to Equity History 18 August 2022

How strong is Argent Industrial’s balance sheet?

We can see from the most recent balance sheet that Argent Industrial had liabilities of R521.2m due within a year, and liabilities of R181.1m due further. On the other hand, it had cash of R184.4 million and R439.2 million in receivables due within a year. His liabilities therefore exceed the sum of his cash and (near-term) debtors by R78.7 million.

As the publicly traded Argent Industrial shares are worth a total of R844.4 million, it seems unlikely that this level of liabilities will be a major threat. However, we think it’s worth keeping an eye on its balance sheet strength as it could change over time. While it does have liabilities that are worth noting, Argent Industrial also has more cash than debt, so we’re pretty confident that it can safely manage its debt.

In addition, Argent Industrial has grown its EBIT by 40% over the past twelve months, and this growth will make it easier to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Argent Industrial’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future, you can check this out free report showing analyst earnings forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. While Argent Industrial has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it can generate that cash. build (or erode) balance. Over the most recent three years, Argent Industrial has recorded free cash flow worth 65% of its EBIT, which is about normal since free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summary

While it always makes sense to look at a company’s total liabilities, it is very reassuring that Argent Industrial has R51.5 million in net cash. And we liked the look of last year’s 40% year-over-year VVRB growth. So is Argent Industrial’s debt a risk? It doesn’t seem that way to us. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie within the balance sheet – far from it. For example – Argent Industrial has 1 warning sign we think you should be aware of.

When all is said and done, sometimes it’s easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with no net debt 100% freeright now

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

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