Is Accel Entertainment (NYSE: ACEL) Using Too Much Debt?

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David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We can see that Accel Entertainment, Inc. (NYSE: ACEL) uses debt in its business. But should shareholders be concerned about its use of debt?

What risk does debt entail?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. 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. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.

Check out our latest analysis for Accel Entertainment

What is Accel Entertainment’s debt?

You can click on the graph below for the historical numbers, but it shows that Accel Entertainment had $ 345.0 million in debt as of June 2021, up from $ 399.0 million a year earlier. However, he also had $ 178.5 million in cash, so his net debt is $ 166.5 million.

NYSE Debt to Equity History: ACEL September 18, 2021

How healthy is Accel Entertainment’s track record?

According to the latest published balance sheet, Accel Entertainment had liabilities of US $ 58.0 million due within 12 months and liabilities of US $ 390.9 million due beyond 12 months. In return, he had $ 178.5 million in cash and $ 3.34 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 267.1 million.

While that might sound like a lot, it’s not that bad as Accel Entertainment has a market cap of US $ 1.11 billion, and therefore could likely strengthen its balance sheet by raising capital if needed. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.

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).

Accel Entertainment has net debt of 2.0 times EBITDA, which isn’t too much, but its interest coverage looks a bit weak, with EBIT just 2.8 times interest expense. This is in large part due to the company’s significant depreciation and amortization charges, which arguably means that its EBITDA is a very generous measure of earnings, and its debt may be heavier than it appears. At first glance. We also note that Accel Entertainment improved its EBIT from a loss last year to a positive amount of $ 38 million. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Accel Entertainment can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. It is therefore worth checking to what extent earnings before interest and taxes (EBIT) are backed by free cash flow. Over the past year, Accel Entertainment generated free cash flow of 92% of its EBIT, more than we expected. This positions it well to pay off debt if it is desirable.

Our point of view

Based on our analysis, the conversion of Accel Entertainment’s EBIT to free cash flow should indicate that it will not have too many problems with its debt. But the other factors we noted above weren’t so encouraging. For example, his interest coverage makes us a little nervous about his debt. Given this range of data points, we believe Accel Entertainment is well positioned to manage its debt levels. That said, the load is heavy enough that we recommend that any shareholder watch it closely. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that Accel Entertainment broadcasts 4 warning signs in our investment analysis , and 1 of them doesn’t go too well with us …

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

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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 material. Simply Wall St has no position in the mentioned stocks.
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