Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Albemarle Corporation (NYSE:ALB) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Albemarle's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 Albemarle had US$3.42b of debt, an increase on US$3.16b, over one year. However, it does have US$2.06b in cash offsetting this, leading to net debt of about US$1.36b.
A Look At Albemarle's Liabilities
Zooming in on the latest balance sheet data, we can see that Albemarle had liabilities of US$2.05b due within 12 months and liabilities of US$5.18b due beyond that. Offsetting these obligations, it had cash of US$2.06b as well as receivables valued at US$1.31b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.86b.
Albemarle has a very large market capitalization of US$11.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Albemarle'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, Albemarle made a loss at the EBIT level, and saw its revenue drop to US$8.4b, which is a fall of 4.3%. That's not what we would hope to see.
Caveat Emptor
Importantly, Albemarle had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$784m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$1.6b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Albemarle that you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
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