close
close
Here’s why StealthGas (NASDAQ:GASS) can manage its debt responsibly

Warren Buffett famously said, “Volatility is far from synonymous with risk.” So it seems that smart people know that debt – which usually accompanies bankruptcies – is a very important factor when assessing a company’s risk. As with many other companies Stealth Gas Inc. (NASDAQ:GASS) uses debt. But should shareholders be concerned about the use of debt?

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a business cannot easily pay it off, either by raising capital or with its own cash flow. If the company can’t meet its legal obligations to pay down debt, shareholders could end up with nothing. However, it is more common (but still costly) for a company to have to issue shares at bargain prices, resulting in permanent shareholder dilution, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When considering how much debt a company has, you first need to consider its cash flow and debt together.

Check out our latest analysis for StealthGas

How much is StealthGas’ net debt?

The chart below, which you can click on for more detail, shows that StealthGas had $123.5 million in debt as of September 2024; about the same as the year before. However, this compares to US$77.2m in cash, leading to net debt of around US$46.3m.

Debt-Equity History Analysis
NasdaqGS:GASS Debt-to-Equity History, November 30, 2024

How strong is StealthGas’s balance sheet?

If we take a closer look at the latest balance sheet data, we can see that StealthGas had liabilities of US$38.7m due within 12 months and liabilities of US$108.9m that were due beyond this. Offsetting this, it had US$77.2m in cash and US$4.56m in receivables due within 12 months. So it has liabilities totaling US$65.8m more than its cash and short-term receivables combined.

StealthGas has a market capitalization of US$196.5m, so it could very likely raise cash to improve its balance sheet if needed. But it’s clear that we should definitely take a close look at whether it can manage its debt without dilution.

We measure a company’s debt load relative to its earnings power by dividing its net debt by its earnings before interest, tax, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and tax (EBIT) can cover its interest expense (interest cover). ). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio).

With net debt of just 0.58 times EBITDA, StealthGas is probably fairly conservative. And it has an interest coverage ratio of 8.8, which is more than enough. Also positive is that StealthGas grew its EBIT by 28% last year, which should make it easier to pay off debt in the future. There is no doubt that the balance sheet is where we learn the most about debt. But it is future earnings that will determine whether StealthGas can maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay off its debts with paper profits; it takes cash. So we definitely need to check whether that EBIT leads to corresponding free cash flow. Over the last three years, StealthGas generated free cash flow worth a very robust 96% of its EBIT, more than we’d expect. This puts it in a good position to pay off debt if desired.

Our view

Fortunately, StealthGas’s impressive EBIT to free cash flow conversion means it has the upper hand on its debt. And that’s just the beginning of the good news, as the EBIT growth rate is also very encouraging. Looking at the bigger picture, we think StealthGas’ use of debt seems quite reasonable and we’re not worried about it. While debt carries risks, it can also provide a higher return on equity when used wisely. There is no doubt that the balance sheet is where we learn the most about debt. However, not all investment risks lie on the balance sheet – quite the opposite. For this purpose, you should inform yourself about the 2 warning signs We discovered StealthGas (including one that can’t be ignored).

If you’re the kind of investor who prefers buying stocks without the burden of debt, then don’t hesitate to explore our exclusive list of net cash growth stocks today.

New: Manage all your stock portfolios in one place

We created this ultimate portfolio companion for stock investors, and it’s free.

• Connect an unlimited number of portfolios and see your total in one currency
• Be alerted to new warning signs or risks via email or mobile phone
• Track the fair value of your stocks

Try a demo portfolio for free

Do you have feedback on this article? Worried about the content? Get in touch directly with us. Alternatively, you can also send an email to editor-team (at) simplywallst.com.

This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Leave a Reply

Your email address will not be published. Required fields are marked *