Shareholders ought to hope for an improvement. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Considering the last year, Sims actually recorded a cash outflow, overall. While Sims has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. So if you're focused on the future you can check out this free report showing analyst profit forecasts.įinally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. But it is future earnings, more than anything, that will determine Sims's ability to maintain a healthy balance sheet going forward.
When analysing debt levels, the balance sheet is the obvious place to start. It was also good to see that despite losing money on the EBIT line last year, Sims turned things around in the last 12 months, delivering and EBIT of AU$111m. When we examine debt levels, we first consider both cash and debt levels, together. Of course, plenty of companies use debt to fund growth, without any negative consequences. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. If things get really bad, the lenders can take control of the business. But should shareholders be worried about its use of debt? When Is Debt Dangerous?ĭebt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Importantly, Sims Limited ( ASX:SGM) does carry debt. What we care about is avoiding the permanent loss of capital.' 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. David Iben put it well when he said, 'Volatility is not a risk we care about.
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