These 4 metrics indicate Asbury Automotive Group (NYSE: ABG) is using debt reasonably well
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”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Mostly, Asbury Automotive Group, Inc. (NYSE: ABG) is in debt. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Asbury Automotive Group
What is the debt of Asbury Automotive Group?
You can click on the graph below for the historical figures, but it shows Asbury Automotive Group owed US $ 1.73 billion in debt in June 2021, up from US $ 1.82 billion a year earlier. However, it has $ 102.3 million in cash offsetting that, leading to net debt of around $ 1.63 billion.
How healthy is Asbury Automotive Group’s balance sheet?
According to the latest published balance sheet, Asbury Automotive Group had debt of US $ 759.3 million due within 12 months and debt of US $ 1.62 billion due beyond 12 months. In return, he had $ 102.3 million in cash and $ 112.9 million in receivables due within 12 months. It therefore has liabilities totaling US $ 2.16 billion more than its cash and short-term receivables combined.
This deficit is not that big as Asbury Automotive Group is worth $ 3.77 billion, and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. 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). Thus, we consider debt versus earnings with and without amortization charges.
Asbury Automotive Group has a net debt to EBITDA of 2.5, which suggests that it uses good leverage to increase returns. But the high interest coverage of 8.9 suggests that he can easily pay off that debt. It should be noted that Asbury Automotive Group’s EBIT has skyrocketed after the rain, gaining 90% in the past twelve months. This will make it easier to manage your debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Asbury Automotive Group’s ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Asbury Automotive Group has actually generated more free cash flow than EBIT. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
Asbury Automotive Group’s EBIT conversion to free cash flow suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But frankly, we think his total passive level undermines that feeling a bit. Considering all of this data, it seems to us that Asbury Automotive Group is taking a fairly reasonable approach to debt. While this carries some risk, it can also improve returns for shareholders. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Note that Asbury Automotive Group shows 2 warning signs in our investment analysis , and 1 of them is a bit rude …
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth stocks today.
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