We believe AGCO (NYSE: AGCO) can stay on top of its debt
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies AGCO Company (NYSE: AGCO) uses debt. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for AGCO
What is AGCO’s debt?
As you can see below, AGCO had $ 1.58 billion in debt in June 2021, up from $ 1.76 billion the year before. On the other hand, it has $ 500.2 million in cash, resulting in net debt of around $ 1.08 billion.
Is AGCO’s Balance Sheet Healthy?
According to the latest published balance sheet, AGCO had liabilities of US $ 3.62 billion maturing 12 months and liabilities of US $ 2.08 billion maturing beyond 12 months. In compensation for these obligations, it had cash of US $ 500.2 million as well as receivables valued at US $ 1.10 billion due within 12 months. Its liabilities therefore total $ 4.10 billion more than the combination of its cash and short-term receivables.
While that might sound like a lot, it’s not that big of a deal as AGCO has a market capitalization of US $ 9.47 billion, so it could likely strengthen its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay your debt.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
AGCO has a low net debt to EBITDA ratio of just 0.91. And its EBIT covers its interest costs 81.6 times more. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, we are happy to report that AGCO has increased its EBIT by 100%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine AGCO’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, AGCO has recorded free cash flow of 77% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
AGCO’s interest coverage suggests she can manage her debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But, on a darker note, we’re a little concerned with its total liability level. Zooming out, AGCO appears to be using debt quite reasonably; and that gets the nod from us. After all, reasonable leverage can increase returns on equity. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 2 warning signs for AGCO that you need to be aware of.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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