Almost every company has some debt. Many large and very profitable companies obtained significant amounts of debt when interest rates were negligible from 2009 until 2021. By doing so, they were able to make effective acquisitions that boosted their bottom lines and increased their cash holdings in order to finance share buybacks, dividend increases, and make themselves more financially secure.
Of course, these firms will have no trouble paying back their debt, and their interest costs are relatively negligible. In such cases, debt is positive for companies and their shareholders. Conversely, some troubled firms that usually lose money have run up extremely large amounts of debt in order to stay in business. Often, these firms are paying high interest rates, and they may have trouble paying back their loans.
And if they are ultimately unable to make the payments on their loans, they will probably declare bankruptcy, causing their stock to become worthless. Consequently, investors should avoid buying the shares of such companies. These three firms are in the latter category, making them three stocks to sell ASAP.
AMC (AMC)
Movie theater owner AMC (NYSE:AMC) had nearly $9 billion in debt as of the end of the first quarter, along with only $624 million in cash. Moreover, its current ratio, which divides a company’s current assets by its current liabilities, is 0.8. The fact that the firm’s current ratio is meaningfully below one suggests that it may have difficulty making its debt payments over the next year.
Another factor that makes AMC one of the stocks to sell ASAP is the fact that its operations generally burn significant amounts of cash each quarter. For example, in Q1, its operations burned $188.3 million of cash, and in the previous quarter it lost $77.8 million of cash on its operations. As a result, it cannot fund the payments on its debt from profits from its business.
Over $2.8 billion of the company’s debt will come due in 2026. Although AMC has held talks with its lenders about extending the due date on those loans, no deal on the matter has been reached yet, and the creditors may not have an incentive to extend the debt since AMC does not seem to be close to breaking into the black. As 2026 draws nearer, investors are likely to become more reluctant to buy AMC stock, causing the shares to tumble.
Walgreens Boots Alliance (WBA)
As of the end of Q1, Walgreens (NYSE:WBA) owed a huge $33.66 billion in debt and had only $711 million of cash. What’s more, its total debt-to-equity ratio was a very large 218%, while its current ratio was 0.65. As I noted previously, the current ratio divides a company’s current assets by its current liabilities, and firms with current ratios below one could have difficulty meeting their financial obligations in the next year.
In Q1, Walgreens did manage to generate $604 million of cash from its operations. However, in the previous two quarters, its operations lost $637 million and $281 million of cash. Consequently, the retailer will probably not be able to pay off its debt with cash generated from its operations.
Also boding badly for Walgreens’ outlook, Bank of America (NYSE:BAC) on June 28 slashed its price target on the shares to $11 from $22. The bank expects the company’s profitability to be hurt by negative pharmacy reimbursement trends and weak sales of its general merchandise going forward. Bank of America cut its fiscal 2024 and fiscal 2025 earnings per share estimates for the retailer to $2.88 and $2.23, respectively, from $3.20 and $3.30. The bank kept an “underperform” rating on the name.
Given Walgreens’ huge debt and negative catalysts, it deserves to be on this list of three stocks to sell ASAP.
Big Lots (BIG)
Big Lots (NYSE:BIG) is by far the most troubled company in this column. Indeed, the discount retailer issued a going concern warning in June. Specifically, the firm warned that it may not be able to make its loan payments and stay in business over the long term. As a result, it’s clearly one of the top three stocks to sell ASAP.
As of the end of Q1, the firm had a total cash position of just $44 million and total debt of $2.38 billion. Moreover, Big Lots’ total debt-to-equity ratio was a stratospheric 2,917%. The company’s current ratio was 1.39, indicating that it may have enough assets to pay its debts over the next year. Still, the company will clearly be in trouble over the longer term.
Indeed, in the 12 months that ended in March, the firm’s operations burned $230 million of cash, so it will not be able to make its loan payments with cash from its operations.
In Q1, the company’s revenue sank 10% versus the same period a year earlier while it generated a loss per share of $4.51.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.