Health Check: How Prudently Does AMREP (NYSE:AXR) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that AMREP Corporation (NYSE:AXR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for AMREP

What Is AMREP's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of April 2020 AMREP had US$3.89m of debt, an increase on US$1.32m, over one year. But on the other hand it also has US$17.5m in cash, leading to a US$13.6m net cash position.

A Look At AMREP's Liabilities

Zooming in on the latest balance sheet data, we can see that AMREP had liabilities of US$3.10m due within 12 months and liabilities of US$8.93m due beyond that. On the other hand, it had cash of US$17.5m and US$57.0k worth of receivables due within a year. So it actually has US$5.53m more liquid assets than total liabilities.

This surplus suggests that AMREP has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, AMREP boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is AMREP's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, AMREP reported revenue of US$19m, which is a gain of 47%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is AMREP?

While AMREP lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$756k. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 47% is a good sign. We'd see further strong growth as an optimistic indication. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with AMREP .

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

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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