Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. 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. Like many other companies Croda International Plc (LON: CRDA) resorts to debt. But does this debt worry shareholders?

Why is debt risky?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Discover our latest analysis for Croda International

What is Croda International’s net debt?

As you can see below, at the end of June 2022, Croda International had a debt of £1.03 billion, up from £888.3 million a year ago. Click on the image for more details. On the other hand, he has £786.4m in cash, resulting in a net debt of around £240.0m.

How healthy is Croda International’s balance sheet?

According to the latest published balance sheet, Croda International had liabilities of £560.4m due within 12 months and liabilities of £1.18bn due beyond 12 months. In return, he had £786.4 million in cash and £472.6 million in debt due within 12 months. Thus, its liabilities total £486.0 million more than the combination of its cash and short-term receivables.

Given that Croda International has a whopping market capitalization of £9.58 billion, it’s hard to believe that these liabilities pose a threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Croda International’s net debt is only 0.42 times its EBITDA. And its EBIT covers its interest charges 22.2 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. In addition, Croda International has increased its EBIT by 35% over the last twelve months, and this growth will facilitate the management of its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Croda International can strengthen its balance sheet over time. So if you want to see what the pros think, you might find this free analyst earnings forecast report Be interesting.

Finally, a company can only repay its debts with cold hard cash, not with book profits. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Croda International’s free cash flow has been 40% of its EBIT, less than we expected. This low cash conversion makes debt management more difficult.

Our point of view

Fortunately, Croda International’s impressive interest coverage means it has the upper hand on its debt. And the good news does not stop there, since its EBIT growth rate also confirms this impression! Overall, we think Croda International’s use of debt seems entirely reasonable and we are not concerned about that. Although debt carries risks, when used wisely, it can also generate a higher return on equity. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 2 warning signs for Croda International of which you should be aware.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

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.

(Bloomberg) — It took only a few years for Carvana Co. to grow from a startup to the second-largest used-car seller in the United States.

Bloomberg’s Most Read

Its fall may be even faster.

The company burned through $2 billion in cash in the six months ended March 31 by one measure, and some analysts predict it will be out of business by the end of 2023. Used car prices are falling at the fastest rate in decades, squeezing potential revenue from the automobiles he planned to sell. Borrowing is becoming increasingly difficult as interest rates rise and fund managers become more selective in lending. Carvana nodded to those risks on Friday with a cut of around 1,500 jobs, or 8% of its workforce.

Carvana shares fell 8.5% on the news, threatening to extend a 96% selloff this year through Thursday. Bonds fell this month after the company posted a bigger-than-expected loss and are now trading below 50 cents on the dollar, reflecting markets’ belief that there is high risk of default.

The company slowed its pace of cash burn, consuming about $188 million in the quarter ended Sept. 30 based on the free cash flow measure. A spokesperson said Carvana had $2.3 billion, between cash and its line of credit, and another $2.1 billion in additional cash. S&P Global Ratings said last week that the company has enough cash to last through the end of 2023, which Carvana agrees with. It continued to gain market share in the third quarter, the spokesperson said.

But the car salesman’s troubles are a dramatic turn for a company that was the darling of hedge funds just a few years ago, with its vending machine-style glass towers a sight to behold along highways in major cities. Americans.

The story continues

winner of the pandemic

Few companies have benefited from the pandemic economy as much as Tempe, Arizona-based Carvana. When Covid fears car dealerships across the country will close in 2020, consumers could go online to select a vehicle from Carvana and have it delivered to their doorstep.

Carvana’s annual revenue has surged, topping $12 billion last year, more than triple 2019 levels. But like many tech companies, Carvana has prioritized growth over profits. He bought competitors and spent a lot on marketing and other sales expenses. It has generated a net profit in just one quarter since its IPO in 2017.

“The company grew too fast and now we see the ramifications of that,” said John Kerschner, head of US securitized products at Janus Henderson Group.

Carvana needs regular funding to operate, as do many companies. He has sold nearly $6 billion in corporate bonds over the past two years. It makes auto loans to car buyers and sells those loans to other businesses or bundles them into bonds called asset-backed securities.

But financing is increasingly difficult. The company’s corporate bonds trade between about 37 and 48 cents on the dollar, making it virtually impossible for the company to borrow economically in this market.

‘say default’

Many investors dumping corporate bonds from Carvana now fear the car salesman will borrow even more, this time backing the loans with durable assets, including its real estate or inventory. The value of this security to other lenders is unclear, as the company did not detail the assets in filings.

But these types of secured financings would hurt existing bondholders, as they would stand behind new lenders if the company actually went bankrupt. And current bond prices imply that this is a real possibility.

“Carvana debt prices indicate default,” said Eric Rosenthal, senior director of leveraged finance at Fitch Ratings. “Debt prices in the secondary market are one of the best indicators of what you’re going to see happen with the company.”

Debt swap?

One avenue the company could take to reduce its indebtedness would be to ask noteholders to surrender their unsecured notes in exchange for a smaller amount of secured debt. Such a swap would amount to default by the criteria of bond raters like Fitch, which said it expects Carvana to default next year.

The company has other assets against which it can borrow. The real estate acquired from Adesa, a car auction company that Carvana bought in May, is likely worth around $1 billion, chief executive Ernie Garcia III told investors on a conference call. The struggles are personal for Garcia and his father, Ernie Garcia II, who hold about four-fifths of voting control, the younger of the two having fallen from the billionaire ranks with the plummeting stock.

Major holders of its most recent bonds are Apollo Global Management, Pacific Investment Management Co., and Franklin Resources Inc. These bonds are backed by Adesa’s assets and consistently trade at higher prices than others. But generally, the company’s securities recently trade at about the same price whether they mature soon or in a decade, known as a bond pile collapse.

The collapse signals that “debt restructuring is inevitable,” said John Dixon, managing director and bond trader at Dinosaur Financial Group, a brokerage. “The question is whether it will be amicable or in court, consensual or adversarial.”

Car loans

Another way the company finances itself is by bundling auto loans into bonds. But its financing costs in this market are also increasing.

In August, Carvana sold asset-backed securities with average maturities of around one year at a yield of 4.471%. That’s more than five times what he paid in December, when the roughly one-year portion of an ABS offering returned just 0.83%.

Since September, asset-backed asset yields have risen sharply for auto lenders, especially for bonds backed by subprime loans. More auto loan borrowers are falling behind on their bills, making many investors more concerned about buying bonds backed by that debt.

“There are so many cheap bonds out there. You don’t want to be a hero,” Kerschner said.

Carvana may have to find other ways to sell its subprime loans. One of the avenues the company has taken this year is to sell the debt to Ally Financial through a running deal through early 2023. There is no indication yet that it will extend or renew the contract, according to Jory Eisenberg, principal research analyst at CreditSights, and Ally has already purchased more than 60% of the $5 billion in loans it agreed to buy from Carvana. Ally declined to comment.

Companies like Ally are being inundated with loans from used car dealerships and other lenders as asset-backed market financing dries up. They will likely seek better terms from sellers instead of renewing deals, said Jennifer Thomas, portfolio manager at Loomis Sayles & Co, in an interview.

“The ability of auto lenders to sell their loans is going to dry up at some point,” Thomas said.

Losing that funding avenue could be the deathblow for Carvana, said Eisenberg of CreditSights.

“If it’s not renewed, it’s kind of catastrophic for them,” Eisenberg said.

–With help from Mary Biekert and Dayana Mustak.

(Updates with layoffs in third paragraph)

Bloomberg Businessweek’s Most Read

©2022 Bloomberg LP

Shares of Walmart’s Inc. WMT increased by 7.74% over the past three months. Before understanding the importance of debt, let’s take a look at how much debt Walmart has.

Walmart’s Debt

According to Walmart’s latest financial statement released on September 2, 2022, total debt stands at $50.70 billion, with $34.22 billion in long-term debt and $16.48 billion in current debt. After adjusting for $13.92 billion in cash equivalents, the company has net debt of $36.78 billion.

Let’s define some of the terms we used in the paragraph above. Current debt is the part of a company’s debt that is due within one year, while long-term debt is the portion due for more than one year. Cash equivalents includes cash and all liquid securities with maturity periods of 90 days or less. Total debt equals current debt plus long-term debt minus cash equivalents.

To understand how leveraged a company is, investors look at the debt-to-equity ratio. Considering Walmart’s total assets of $247.20 billion, the debt-to-equity ratio is 0.21. Generally, a debt ratio greater than 1 indicates that a considerable part of the debt is financed by assets. A higher debt-to-equity ratio may also imply that the company could be at risk of default if interest rates were to rise. However, debt ratios vary widely from industry to industry. A debt ratio of 35% may be higher for one industry, but average for another.

Why Debt Matters

Besides equity, debt is an important factor in a company’s capital structure and contributes to its growth. Due to its lower cost of funding than equity, it becomes an attractive option for executives trying to raise capital.

However, due to interest payment obligations, a company’s cash flow can be affected. Equity holders can retain excess profits, generated by debt capital, when companies use debt capital for their business operations.

Looking for stocks with low leverage ratios? Check out Benzinga Pro, a market research platform that gives investors near-instant access to dozens of stock market metrics, including leverage ratio. Click here to find out more.

This article was generated by Benzinga’s automated content engine and reviewed by an editor.

PATNA: Moved by the plight of an elderly man, a Bihar district judge paid off his debt in cash on Saturday. The touching story of humanism unfolded during a Lok Adalat held in Jehanabad, Central Bihar.

Rajendra Chouhan reached the Lok Adalat where he was called to sort out a problem related to the late payment of his bank loan worth Rs 18,000. When he left his home, he had only Rs 5,000 in his pocket, while a man accompanying him carried Rs 3,000. They were still missing Rs 10,000.

Seeing the plight of the frail-looking Chouhan, District Judge Rakesh Kumar Singh immediately took out 10,000 rupees from his pocket and paid the remaining amount to settle the dues. Chouhan while talking to reporters with folded hands prayed to God for his blessing to “Judge Saheb”.

</p> <p>PATNA: Moved by the plight of an elderly man, a Bihar district judge paid off his debt in cash on Saturday. The touching story of humanism unfolded during a Lok Adalat held in Jehanabad, Central Bihar. Rajendra Chouhan reached the Lok Adalat where he was called to sort out a problem related to the late payment of his bank loan worth Rs 18,000. When he left his home, he had only Rs 5,000 in his pocket, while a man accompanying him carried Rs 3,000. They were still short of Rs 10,000. out of pocket and paid the remaining amount to settle the dues. Chouhan while talking to reporters with folded hands prayed to God for his blessing to “Judge Saheb”.<br />

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that RATH Aktiengesellschaft (LIFE:RAT) has a debt on its balance sheet. But the real question is whether this debt makes the business risky.

Why is debt risky?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for RATH

What is RATH’s net debt?

The image below, which you can click on for more details, shows that in June 2022, RATH had a debt of 39.9 million euros, compared to 37.8 million euros in one year. However, he also had €7.63 million in cash, so his net debt is €32.2 million.

A Look at RATH’s Responsibilities

Zooming in on the latest balance sheet data, we can see that RATH had liabilities of €37.6m due within 12 months and liabilities of €26.3m due beyond. In return, it had €7.63 million in cash and €26.6 million in receivables due within 12 months. It therefore has liabilities totaling 29.6 million euros more than its cash and short-term receivables, combined.

That’s a mountain of leverage compared to its market capitalization of €39.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly.

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.

RATH’s debt is 3.9 times its EBITDA, and its EBIT covers its interest expense 3.9 times. Taken together, this implies that, while we wouldn’t like to see debt levels increase, we think he can manage his current leverage. Another concern for investors could be that RATH’s EBIT fell 14% last year. If things continue like this, dealing with debt will be about as easy as putting an angry house cat in its travel box. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since RATH will need income to repay this debt. So if you want to know more about his earnings, it might be worth checking out. this chart of its long-term earnings trend.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, RATH has produced strong free cash flow equivalent to 55% of its EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.

Our point of view

To be frank, RATH’s net debt to EBITDA ratio and its history of (non-)growth in its EBIT make us rather uncomfortable with its debt levels. But at least it’s decent enough to convert EBIT to free cash flow; it’s encouraging. Overall, we think it’s fair to say that RATH has enough debt that there is real risk around the balance sheet. If all goes well, this should boost returns, but on the other hand, the risk of permanent capital loss is increased by debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example RATH has 4 warning signs (and 3 potentially serious) we think you should know.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

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.

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. 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. Like many other companies CIBT Education Group Inc. (EAST: MBA) resorts to debt. But does this debt worry shareholders?

What risk does debt carry?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check opportunities and risks within the CA Consumer Services industry.

What is CIBT Education Group’s net debt?

As you can see below, CIBT Education Group had C$240.9 million in debt as of May 2022, about the same as the previous year. You can click on the graph for more details. However, since he has a cash reserve of C$11.4 million, his net debt is less, at around C$229.5 million.

A look at the responsibilities of CIBT Education Group

The latest balance sheet data shows that CIBT Education Group had liabilities of C$235.3 million due within one year, and liabilities of C$79.0 million falling due thereafter. On the other hand, it had liquid assets of 11.4 million Canadian dollars and 47.9 million Canadian dollars of receivables due within one year. It therefore has liabilities totaling C$255.0 million more than its cash and short-term receivables, combined.

This deficit casts a shadow over the C$30.6 million business, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. After all, CIBT Education Group would likely need a significant recapitalization if it were to pay its creditors today.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

CIBT Education Group shareholders face the double whammy of a high net debt to EBITDA ratio (31.1) and quite low interest coverage, as EBIT is only 0.43 times interest charges. The debt burden here is considerable. On the bright side, CIBT Education Group has increased its EBIT by 64% over the past year. Like the milk of human kindness, this type of growth increases resilience, making the business more capable of managing debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of CIBT Education Group that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, CIBT Education Group has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our point of view

To be frank, CIBT Education Group’s interest coverage and track record of keeping total liabilities under control makes us rather uncomfortable with its level of leverage. But at least it’s decent enough to convert EBIT to free cash flow; it’s encouraging. Once we consider all of the above factors together, it seems to us that CIBT Education Group’s debt makes it a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. 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. For example, we have identified 3 warning signs for CIBT Education Group (2 are potentially serious) you should be aware.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

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.

• Crowd Media (CM8) Reports Positive Net Operating Cash Flow for the September Quarter of $36,000, a 210% Improvement over the Prior Year
• As of September 30, the company was debt free with $2.57 million in cash in the bank, a substantial increase from its reported $340,000 in the June quarter.
• The company recorded $214,000 of free cash flow from investing activities during the quarter, which was used for further investment in intellectual property
• Commenting on the quarter, CEO Idan Schmorak said the company capitalized on “great work” by expanding subscription products into new markets and regions.
• Crowd Media shares rose 13.6% to close at 2.5 cents

Crowd Media (CM8) achieved positive net operating cash flow for the September quarter of $36,000, a 210% improvement over the prior year.

As of September 30, the company said it had no debt with $2.57 million in cash in the bank, a substantial increase from its reported $340,000 in the June quarter.

The company recorded $214,000 of free cash flow from investing activities during the quarter, which was used for further investment in intellectual property.

Commenting on the quarter, CEO Idan Schmorak said the company capitalized on “great work” by expanding subscription products to new markets and regions and creating greater opportunities for digital avatars.

“This was demonstrated by the five new big tech companies that licensed Crowd’s Talking Head platform for a conversational AI solution to address their business challenges that can be scaled to multiple languages ​​without additional hires and provide humanized interactions. globally,” he said.

“This milestone, along with all of the other business and operational achievements of the past quarter, validates Crowd’s vision.

“Additionally, the insights we gather from customers further support the scaling of our software development.”

The big five anonymous tech companies had purchased three licenses for the Talking Head platform for two years to provide them with digital avatars.

The company believes that the initial license is the cornerstone of Crowd’s relationship with the company and opens up new business opportunities.

During the quarter, the company’s mobile subscription expanded its market with Bedtime Stories now in Oman and Kuwait, AstroVIP in the Czech Republic, Portugal and the Netherlands, and Potion Games in Oman.

Shares of Crowd Media rose 13.6% to close at 2.5 cents.

Industrial real estate owners continue to benefit from robust demand, low vacancy rates and a shift in consumer behavior towards e-commerce that continues to fuel the asset class – but a host of challenges threaten to bring more difficult times.

Bisnow/Ciara Long

Trammell Crow Co.’s Andrew Mele and EverWest’s Krystal Arceneaux at the Northeast Industrial Summit in Bisnow on October 18.

Frozen debt markets make deals nearly impossible to fund, panelists told Bisnow’s Northeast Industry and Logistics event this week, held at the New York City Bar Association in Midtown. The rising interest rate environment is generating uncertainty that scares off some investors.

Adding to this challenge for developers are local communities who are speaking out against warehouse development with more vigor than ever. But to combat all of this, they said, there is a deep pool of companies that need more logistics space.

“I’ve never been in a market where we have 2.5% vacancy and you can’t find a financial partner,” Andrew Mele, chief executive of Trammell Crow Co., said at the event. “That’s the most interesting thing. And I get it, people say, ‘Hey, let’s not catch a falling knife… let’s wait six months. “”

Demand may be down, but the warehouse market remains historically tight. The national industrial vacancy rose in the third quarter to 4%, just above the all-time low of 3.9%, according to Savills. Leasing activity fell below 200 million square feet for the first time in eight quarters.

The slowdown was driven by inflation and interest rate hikes weighing on industrial tenants, but Savills called the drop in leases only a “limited” sign of a cooling. Tenant-focused brokerage expects rent growth to slow after peaking at 40% in some markets last year.

Amazon has makes waves in the industry over the past year after the closure and cancellation or postponement of plans for dozens of future facilities. As he withdrew, panelists said other types of businesses have responded to some of that demand.

“Two years ago, [tenant demand] was heavy e-commerce. It was Amazon, Amazon and Amazon,” Turnbridge Equities managing director Ryan Nelson said. “It really rocked last year. And now it’s largely [third-party logistics] it is the engine of the market.

AKF Group partner Debbie Reider said she has seen an increase in demand for fresh food in urban markets. DH Property Holdings development manager Michael Bennett said his company is seeing significant demand from adjacent logistics users, such as those shipping parcels.

Bisnow/Ciara Long

Shike Goedar of Arden Logistics Parks, Dave Greek of Greek Development and Larry Schiffenhaus of CBRE

Panelists said strong demand is affecting the sales market for this type of industrial property, making sellers less likely to move on price, even as borrowing costs have soared this year.

Realterm VP of Investments Ben Andreycak predicted the stalemate could last nine to 12 months as the bid-ask spread remains stubbornly high.

“I think everyone here is still looking for deals, but the bar has risen to a point where, because of the debt market, because of the cap rate assumptions, the deals that we think are bargains are a far cry from where sellers have been seeing prices for the past three to four years,” he said.

Prologis, the largest developer of industrial properties, said in its income statement this week that it expects a decline in sales and speculative development in response to the funding environment.

At the event, Prologis chief executive Fritz Wyler said he expects a period of lackluster activity and then a serious return in trading volume as buyers with access to liquidity that have already been forced out of the market are being offered opportunities.

“I think a lot of people are now starting to look around waiting for markets they couldn’t get into,” he said. “Jersey is still a market, LA is still a market, even Miami today. People want market share, and they’ve been stuck because there’s 20 to 30 bidders on something.

Bisnow/Ciara Long

Ben Andreycak from Realterm, Fritz Wyler from Prologis and Marc Duval from JLL

What’s shaping up to be more problematic for industrial developers than capital markets is the community’s growing aversion to warehouse development, panelists said.

This is a problem that has arisen in the busiest warehouse market in the country, Inland Empire of Californiawhere several cities have voted to temporarily ban warehouse development amid growing frustration over the impact of this type of development has on communities.

“I think the financial side is going to hedge somehow,” said Steven Beyda, head of acquisitions at Woodmont Properties. “I think the one thing that we in this room can’t really control is the legislative and administrative process, with cities in the state of New Jersey, in particular, becoming extremely anti-warehouse. As a group, we need to do a better job of facing the community and presenting the value and benefits of industrial markets to the state itself.

He said this issue is going to be the biggest challenge for industrial construction over the next decade. Just last month, Queens Council member Tiffany Cabán has approved a major development in Astoria called Hallets North, saying it will revert to last mile distribution if she does not give the developer wishing to build a 1,400 unit development there approval necessary. Last year, Two Trees Management threatens to sell its Brooklyn site to a logistics developer if it does not obtain the required rezoning to build a 3.5-acre mixed-use project on the Williamsburg waterfront that will include more than 1,000 residential units.

“Fifteen years ago when we went to a city, our pitch was very simple: it was jobs and taxes, right?” said Dave Greek of Greek Development. “That’s what we bring to your town and, by the way, we don’t bring housing, so we don’t bring kids to your schools. But as e-commerce has grown and people have become more familiar with how these facilities work and recoil has become much more popular and much stronger…we make different design decisions, and we certainly approach the cantons a little differently. “

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. 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 can see that Safe Bulkers, Inc. (NYSE: SB) uses debt in its operations. But should shareholders worry about its use of debt?

When is debt a problem?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.

Check opportunities and risks within the American maritime industry.

How much debt does Safe Bulkers have?

You can click on the chart below for historical numbers, but it shows Safe Bulkers had $424.8 million in debt in June 2022, up from $474.6 million a year prior. However, he has $129.1 million in cash to offset this, resulting in a net debt of approximately $295.6 million.

How strong is Safe Bulkers’ balance sheet?

The latest balance sheet data shows that Safe Bulkers had liabilities of $76.2 million due within the year, and liabilities of $414.3 million due thereafter. In return, it had $129.1 million in cash and $8.75 million in receivables due within 12 months. It therefore has liabilities totaling $352.7 million more than its cash and short-term receivables, combined.

When you consider that shortfall exceeds the company’s US$339.1 million market capitalization, you might well be inclined to take a close look at the balance sheet. In the scenario where the company were to quickly clean up its balance sheet, it seems likely that shareholders would suffer significant dilution.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Safe Bulkers’ net debt is only 1.2 times its EBITDA. And its EBIT covers its interest charges 22.4 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Even better, Safe Bulkers increased its EBIT by 120% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in years to come. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Safe Bulkers can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

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 three years, Safe Bulkers has recorded free cash flow of 71% 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, Safe Bulkers’ impressive interest coverage means it has the upper hand on its debt. But the hard truth is that we are concerned about his total passive level. Looking at all of the aforementioned factors together, it seems to us that Safe Bulkers can manage their debt quite comfortably. On the plus side, this leverage can increase shareholder returns, but the potential downside is more risk of loss, so it’s worth keeping an eye on the balance sheet. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 3 warning signs we spotted some with Safe Bulkers (including 1 that is significant).

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

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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.