There are lots of things to like about Amcor Ltd (ASX: AMC) but there are a couple of facts I just can’t move past.
Amcor is a global packaging company. It develops and produces flexible packaging, rigid containers, specialty cartons, closures and services for food, beverage, pharmaceutical, medical device, home and personal care and other products.
The Good
The kind of figures that draw me to look at Amcor are ones like return on equity (ROE) and dividend yield.
Amcor’s ROE in 2018 was 74.4% and the two years prior it was above 85%. This places Amcor among the best on the ASX for ROE, a measure which says a lot about a company’s ability to generate value. A high ROE shows that Amcor is capable of taking a dollar and turning it into two – or, I guess, $1.74. Still, not bad.
The dividend yield is also currently 4.2%, which most would deem a healthy yield. Add to this a 5% capital gain over the last 12 months and you’re looking at a nice addition to your portfolio.
The Not-So-Good
Amcor has debt and quite a lot of it. In fact, it has a debt-to-equity ratio of 412%. Some investors don’t mind debt, and with interest cover of 5.4 times, it looks like Amcor can pay it back pretty comfortably.
Personally, I try to steer clear of companies with a lot of debt, especially when it’s several times more than the shareholder’s equity. Comparing ROE to return on assets (ROA), Amcor’s ROA is only 10%. The further apart these two figures, the higher the leverage of the company.
Even for a company with a high interest cover, debt always adds risk because it’s one more liability to think about.
On top of that, Amcor’s actual net profit fell by 18.8% in 1H19 despite marginally higher revenue. This suggests that they’re struggling with costs and margins and not making the kind of returns they were able to previously.
Although some of these costs were presented as a one-off, there’s a fair argument that these costs are actually recurring, such as hyperinflation adjustment and Bemis transaction and integration costs. This Rask Media article examines the half-year report more closely.
To Sum Up
Amcor certainly has some positive points, but I think there are other companies that can produce similar returns without taking on the same level of debt and risk. When you can get the same return for less risk, that’s always going to be a better option.
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