Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Century Aluminum Company (NASDAQ:CENX) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Century Aluminum
What Is Century Aluminum's Net Debt?
As you can see below, at the end of June 2023, Century Aluminum had US$553.4m of debt, up from US$427.6m a year ago. Click the image for more detail. However, it does have US$50.6m in cash offsetting this, leading to net debt of about US$502.8m.
A Look At Century Aluminum's Liabilities
We can see from the most recent balance sheet that Century Aluminum had liabilities of US$573.4m falling due within a year, and liabilities of US$769.1m due beyond that. Offsetting these obligations, it had cash of US$50.6m as well as receivables valued at US$67.0m due within 12 months. So it has liabilities totalling US$1.22b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the US$610.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Century Aluminum would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Century Aluminum's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Century Aluminum made a loss at the EBIT level, and saw its revenue drop to US$2.3b, which is a fall of 19%. We would much prefer see growth.
Caveat Emptor
Not only did Century Aluminum's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$55m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$116m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Century Aluminum you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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 does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
