Is Ascent Industries (NASDAQ:ACNT) a risky investment?

Warren Buffett said: “Volatility is far from synonymous with risk. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that Ascent Industries Co. (NASDAQ:ACNT) has debt on its balance sheet. But should shareholders worry about its use of debt?

When is debt a problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Ascent Industries

How much debt does Ascent Industries have?

You can click on the graph below for historical numbers, but it shows that in June 2022, Ascent Industries had debt of $69.2 million, an increase of $59.5 million, year over year. . And he doesn’t have a lot of cash, so his net debt is about the same.

NasdaqGM: ACNT Debt to Equity History September 7, 2022

How strong is Ascent Industries’ balance sheet?

According to the last published balance sheet, Ascent Industries had liabilities of $72.0 million due within 12 months and liabilities of $100.5 million due beyond 12 months. On the other hand, it had cash of 245,000 USD and 63.9 million USD in receivables due within one year. Thus, its liabilities outweigh the sum of its cash and receivables (current) by $108.4 million.

This shortfall is sizable relative to its market capitalization of US$156.5 million, so he suggests shareholders watch Ascent Industries’ use of debt. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.

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). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Ascent Industries’ net debt is only 1.2 times its EBITDA. And its EBIT covers its interest charges 31.4 times. So we’re pretty relaxed about his super-conservative use of debt. Even better, Ascent Industries increased its EBIT by 865% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in years to come. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since Ascent Industries will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past two years, Ascent Industries has recorded free cash flow of 64% of its EBIT, which is about normal given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.

Our point of view

Fortunately, Ascent Industries’ impressive interest coverage means it has the upper hand on its debt. But, on a darker note, we’re a bit concerned about his total passive level. Given all of this data, it seems to us that Ascent Industries is taking a pretty sensible approach to debt. While this carries some risk, it can also improve shareholder returns. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Ascent Industries you should know.

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.

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.

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