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Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that 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, Terminix Global Holdings, Inc. (NYSE: TMX) is in debt. But the real question is whether this debt makes the business risky.
When is debt a problem?
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. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first look at cash and debt levels together.
Check out our latest review for Terminix Global Holdings
What is the debt of Terminix Global Holdings?
The image below, which you can click for more details, shows that Terminix Global Holdings had a debt of US $ 833.0 million at the end of March 2021, a reduction from US $ 1.63 billion. US dollars over one year. However, it has $ 484.0 million in cash offsetting this, which leads to net debt of around $ 349.0 million.
A look at the liabilities of Terminix Global Holdings
The latest balance sheet data shows that Terminix Global Holdings had liabilities of $ 575.0 million due within one year, and liabilities of $ 1.48 billion due thereafter. On the other hand, it had US $ 484.0 million in cash and US $ 182.0 million in receivables due within one year. Its liabilities therefore total US $ 1.39 billion more than the combination of its cash and short-term receivables.
While this may sound like a lot, it is not that big of a deal since Terminix Global Holdings has a market capitalization of US $ 6.33 billion, and could therefore likely strengthen its balance sheet by raising capital if needed. But we absolutely want to keep our eyes open for indications that its debt is too risky.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Looking at its net debt over EBITDA of 1.0 and interest coverage of 3.5 times, it seems to us that Terminix Global Holdings is probably using the debt in a fairly reasonable way. We therefore recommend that you keep a close eye on the impact of financing costs on the business. It should be noted that Terminix Global Holdings’ EBIT has soared like bamboo after the rain, gaining 40% in the past twelve months. This will facilitate the management of its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Terminix Global Holdings’ ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts‘ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Terminix Global Holdings has recorded free cash flow of 44% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.
Our point of view
The good news is that Terminix Global Holdings’ demonstrated ability to increase EBIT delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a little concerned about its coverage of interest. All these things considered, it looks like Terminix Global Holdings can comfortably manage its current debt levels. Of course, while this leverage can improve returns on equity, it comes with more risk, so it’s worth keeping an eye out for. 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. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Terminix Global Holdings you should know.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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This Simply Wall St article is general in nature. 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 any of the stocks mentioned.
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