ATS Automation Tooling Systems (TSE: ATA) has a pretty healthy record

Howard Marks put it nicely when he said, instead of worrying about stock price volatility, “The possibility of permanent loss is the risk I’m worried about … and every practical investor I know takes to worry.” Whenever we think about how risky a business is, we always like to look at the use of debt as over-indebtedness can lead to ruin. We make a note of that ATS Automation Tooling Systems Inc. (TSE: ATA) has debt on its balance sheet. The real question, however, is whether these debts make the company risky.

Why does debt pose a risk?

In general, debt doesn’t become a real problem until a company can’t simply pay it off, whether by raising capital or using its own cash flow. Ultimately, if the company fails to meet its legal debt settlement obligations, shareholders could get away with nothing. While this isn’t too common, we often see indebted companies permanently diluting their shareholders by forcing lenders to raise capital at a distressed price. The advantage of debt, of course, is that it is often cheap capital, especially when it replaces the dilution of a business with the ability to reinvest too high a return. When we think about using a company’s debt, let’s first look at cash and debt together.

Check out our latest analysis for ATS Automation Tooling Systems

What is the net debt of ATS Automation Tooling Systems?

As you can see below, ATS Automation Tooling Systems had debt of $ 334.6 million in December 2020, roughly the same as last year. You can click on the diagram for more information. However, this is offset by CA $ 224.5 million in cash, resulting in a net debt of approximately CA $ 110.1 million.

TSX: ATA Debt-to-Equity History March 21, 2021

A look at ATS Automation Tooling Systems’ liabilities

If we zoom in on the latest balance sheet data, we can see that ATS Automation Tooling Systems had liabilities of $ 518.0 million and also liabilities of $ 483.5 million in 12 months. On the flip side, it had CA $ 224.5 million in cash and CA $ 526.5 million in receivables due within one year. So his debt is CA $ 250.4 million more than the combination of cash and short-term receivables.

Of course, ATS Automation Tooling Systems has a market capitalization of $ 2.49 billion, so these liabilities are likely to be manageable. But there are enough liabilities that we would definitely recommend that shareholders continue to monitor the balance sheet in the future.

To estimate a company’s debt in relation to its profits, 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 interest expense (its interest coverage). The advantage of this approach is that we take into account both the absolute level of debt (with net debt to EBITDA) and the actual interest expenses associated with this debt (with its interest coverage ratio).

While ATS Automation Tooling Systems’ low debt to EBITDA ratio of 0.72 only suggests moderate debt consumption, the fact that EBIT only covered interest expenses 3.5 times last year makes us pause. We therefore recommend keeping a close eye on the business impact of financing costs. The bad news is that ATS Automation Tooling Systems’ EBIT fell 11% last year. Unless this decline is stopped, debt management will be more difficult than selling broccoli-flavored ice cream for a premium. When analyzing debt levels, the obvious starting point is the balance sheet. But ultimately, the company’s future profitability will determine whether ATS Automation Tooling Systems can strengthen its balance sheet over time. So if you are focused on the future, this is what you can check out here for free Analyst earnings forecast report.

But our final consideration is also important because a company cannot pay its debts with paper profits; it takes cold cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, ATS Automation Tooling Systems has generated solid free cash flow of 55% of its EBIT, which is roughly in line with our expectations. That cold money means it can get out of debt if it wants to.

Our view

According to our analysis, ATS Automation Tooling Systems’ net debt as a percentage of EBITDA should signal that it won’t have too much of a problem with its debt. Our other observations, however, were not so encouraging. For example, the EBIT growth rate makes us a little nervous about debt. Looking at all of this data, we are a little cautious about ATS Automation Tooling Systems’ indebtedness. While debt does benefit in higher potential returns, we believe it is important that shareholders think about how debt could make the stock riskier. Before most other metrics, we think it’s important to track how fast, if at all, earnings per share are growing. If you have come to this realization too, you are in luck because today you can Check out this interactive graph of ATS Automation Tooling Systems earnings per share for free.

At the end of the day, it’s often better to focus on companies that are net debt free. You can access it our special list of such companies (all with a track record of earnings growth). It’s free.

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